Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By producing where marginal cost equals marginal revenue
B
By setting price equal to average total cost
C
By maximizing total revenue regardless of costs
D
By producing at the lowest point of the average cost curve
Understanding the Answer
Let's break down why this is correct
Answer
In a monopoly, a firm determines the optimal output level to maximize profit by analyzing its costs and the market demand for its product. The firm will produce the quantity of goods where its marginal cost, which is the cost of producing one more unit, equals its marginal revenue, the additional income from selling one more unit. This point is crucial because if the firm produces less, it could increase profits by selling more, and if it produces more, it could lose money on additional units. For example, if a monopoly produces 100 widgets and finds that producing 101 widgets would cost $5 but earn only $4 more in revenue, it should stick to producing 100 widgets. By finding this balance, the monopoly can ensure it maximizes its profits efficiently.
Detailed Explanation
A monopoly maximizes profit by producing where marginal cost equals marginal revenue. Other options are incorrect because Some might think setting price equal to average total cost is best; Maximizing total revenue sounds good, but it ignores costs.
Key Concepts
Profit Maximization
Monopoly Market Structure
Marginal Cost and Revenue
Topic
Profit Maximization in Monopolies
Difficulty
easy level question
Cognitive Level
understand
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