Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Monopolists set prices where marginal cost equals marginal revenue to maximize profits.
B
Monopolists always price above marginal cost to ensure high demand.
C
Price discrimination occurs only when marginal cost exceeds marginal revenue.
D
Monopolists will produce until marginal cost is zero to maximize profits.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopoly, the company is the only seller of a product, which gives it control over the price. To maximize profits, the monopolist looks at two important concepts: marginal cost and marginal revenue. Marginal cost is the cost of producing one more unit of a good, while marginal revenue is the extra money made from selling that additional unit. The monopolist will continue to produce more units as long as the marginal revenue is greater than the marginal cost. For example, if it costs $5 to make one more toy but selling that toy brings in $10, the monopolist will keep producing toys until the extra profit starts to shrink, ensuring they set prices that maximize their profits while considering these costs and revenues.
Detailed Explanation
Monopolists want to make the most money. Other options are incorrect because Some might think that charging more than it costs to make something will always attract buyers; It's a common mistake to think price discrimination only happens when costs are high.
Key Concepts
Profit Maximization in Monopolies
Marginal Cost and Marginal Revenue
Price Discrimination
Topic
Profit Maximization in Monopolies
Difficulty
medium level question
Cognitive Level
understand
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