Question

Under the maintained assumption that firms are profit maximizers, what is the general profit maximizing rule that firms regardless of market structure follow in determining their output level?

Why is the monopolist unable to determine unilaterally both price and quantity?

Answer 1

The generalized profit maximizing rule is to produce that output for which Marginal revenue (MR) equals Marginal cost (MC). In the special case of perfect competition, demand curve is horizontal and demand (Price) equals MR, so this is equivalent to Price = MR = MC.

A monopolist faces a downward sloping demand curve where price and quantity demanded are inversely related. Therefore, if monopolist chooses a specific price, the corresponding quantity is determined by the demand function, whereas if the monopolist chooses a specific quantity, the corresponding price is determined by the demand function. So the monopolist cannot choose both price and quantity.