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 maximizing total revenue regardless of cost
C
By setting price equal to average total cost
D
By producing at the output where demand is highest
Understanding the Answer
Let's break down why this is correct
Answer
In a monopoly, a firm determines the optimal output level for profit maximization by analyzing its costs and the demand for its product. The firm will look for the point where its marginal cost, which is the cost of producing one more unit, equals its marginal revenue, the income earned from selling that additional unit. When these two values are equal, the firm maximizes its profit because producing more would cost more than the revenue gained. For example, if a monopolist finds that producing 100 units costs $500 and brings in $600 in revenue, they will continue to produce until the cost of making an additional unit equals the revenue from selling it. This careful balance helps the monopolist decide how many units to produce to earn the most profit.
Detailed Explanation
A monopoly finds the best amount to produce by looking at where the extra cost of making one more item equals the extra money it makes from selling that item. Other options are incorrect because Some might think that just making as much money as possible is the goal; People might believe that setting the price to cover all costs is the best way.
Key Concepts
Profit Maximization in Monopolies
Marginal Revenue and Marginal Cost
Price Discrimination
Topic
Profit Maximization in Monopolies
Difficulty
medium level question
Cognitive Level
understand
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