Question

When a ski resort with some monopoly power is maximizing profit, price is greater than marginal cost. Thus, consumers are willing to pay more for additional lift tickets than the tickets cost to produce. So why does the ski resort not charge a lower price per lift ticket and increase output?

Answer 1

A profit maximising monopolist optimises where marginal revenue from selling an additional ticket is equal to the marginal cost of selling that ticket. If the resort charges a lower price and sell more tickets, the marginal revenue will fall below the marginal cost. In this case, the resort will be adding more to the total cost than to the total revenue and hence profits will falls. Thus he will be incurring loss on the additional tickets sold and thus will reduce profit.

Profits are thus maximised when MR =MC.