Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By setting the price above marginal cost and producing where marginal revenue equals marginal cost
B
By producing at the level where average total cost is minimized
C
By equating price to marginal cost at all output levels
D
By maximizing total revenue without regard to marginal cost
Understanding the Answer
Let's break down why this is correct
Answer
In a monopoly market, a firm has control over the price of its product because it is the only seller. To determine the optimal output level, the firm looks at its marginal cost, which is the cost of producing one more unit. The firm will continue to produce more units as long as the price it can charge for those units is greater than or equal to the marginal cost. If the firm can engage in price discrimination, it can charge different prices to different customers based on their willingness to pay, maximizing its profits further. For example, if a monopoly selling ice cream can charge $5 to one group of customers and $3 to another, it will produce until the marginal cost of making the last ice cream is equal to the price charged to the last customer in each group.
Detailed Explanation
A monopoly sets a price higher than the cost to make one more item. Other options are incorrect because Some might think a firm should produce at the lowest average cost; It's a common mistake to think price should equal cost at all times.
Key Concepts
price-setting power
marginal cost
price discrimination
Topic
Monopoly Output Levels
Difficulty
hard level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.