Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase production until marginal cost equals marginal revenue.
B
Decrease production to raise the price above the marginal cost.
C
Continue producing at any level as long as they cover average total costs.
D
Produce at the point where demand is highest regardless of costs.
Understanding the Answer
Let's break down why this is correct
Answer
To maximize profits, a local monopoly should produce output where its marginal cost equals its marginal revenue. This means that the cost of producing one more unit of a good should be the same as the revenue gained from selling that unit. If the marginal cost is lower than the marginal revenue, the monopolist can increase profits by producing more. Conversely, if the marginal cost exceeds the marginal revenue, the monopolist should reduce output to avoid losses. For example, if a monopolist finds that producing 100 units costs them $10 to make the 101st unit but they can sell it for $15, they should keep producing until the cost and revenue match.
Detailed Explanation
To make the most money, a monopolist should keep increasing production until the cost of making one more item (marginal cost) is equal to the money made from selling that item (marginal revenue). Other options are incorrect because Some might think lowering production raises prices, but it can actually reduce total profit; It's a common mistake to think just covering costs is enough.
Key Concepts
Profit Maximization in Monopolies
Marginal Revenue and Marginal Cost
Market Power
Topic
Profit Maximization in Monopolies
Difficulty
easy level question
Cognitive Level
understand
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