📚 Learning Guide
Profit Maximization in Monopolies
hard

In a monopoly, if the marginal cost is below the marginal revenue, what should the monopolist do to maximize profit?

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Learning Path
Learning Path

Question & Answer
1
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Choose the Best Answer

A

Increase output to maximize profit

B

Decrease output to increase price

C

Maintain current output level

D

Increase prices immediately without changing output

Understanding the Answer

Let's break down why this is correct

Answer

In a monopoly, when the marginal cost is below the marginal revenue, it means that the company can make more money by producing and selling additional units of its product. To maximize profit, the monopolist should increase production because each extra unit sold will add more to revenue than it costs to produce. For example, if the cost to make one more product is $5 and the revenue from selling it is $10, the monopolist gains $5 for that unit. By continuing to produce more until the marginal cost equals the marginal revenue, the monopolist ensures they are making the highest possible profit. This strategy helps the monopolist take full advantage of the market conditions to earn more money.

Detailed Explanation

When the cost to make one more item is less than what you earn from selling it, you should make more. Other options are incorrect because Some might think lowering production raises prices, but it actually reduces sales; Staying the same might seem safe, but if you can earn more by producing more, you're missing out.

Key Concepts

Profit Maximization in Monopolies
Marginal Revenue and Marginal Cost
Imperfect Price Discrimination
Topic

Profit Maximization in Monopolies

Difficulty

hard level question

Cognitive Level

understand

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