Question

Which of the following is true about monopoly pricing? (a) A monopolist always prices on the...

Which of the following is true about monopoly pricing?

(a) A monopolist always prices on the elastic part of its demand curve

(b) A monopolist always prices by setting MR = AC

(c) A monopolist always prices to maximize deadweight loss

(d) A monopolist always sets P = MC to deter entry

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Answer #1

Solution:- Optiom (a) is correct that is a monopolist always prices on the elastic part of its demand curve.

Reason- A monopolist produces the output till MR bacomes equal to MC i.e MR=MC. When demand curve is elastic MR is positive. However, when demand curve is inelastic MR is naegative which means that revenue received from selling an additional unit of output will be negative and total revenue will start to fall. In other words, in inelastic portion of the demand curve prices fall by a greater proportion than the rise in qiantity, which leads to fall in total revenue. So, a monopolist would never operate in the region where MR becomes negative.

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