Question

Suppose that a monopolist calculates that at its present output marginal revenue is $10.00 and marginal cost is $15.00. In order to maximize profits this firm should

a. keep price the same and raise output.

b. raise price and lower output.

c. keep price the same and lower output.

d. lower price and raise output.

Answer 1

Profit is maximized when MR=MC . MR curve for a monopolist is downward sloping. MC can be upward sloping or constant.

Here MR<MC . This means that monopolist is producing at a level more than the profit maximizing level of output. If monopolist reduces the level of output, MC will start falling if it is upward sloping curve and MR will start rising. This will happen as long as MR= MC.

Even if MC is constant for monopolist, a fall in output will increase MR. This will happen as long as MR=MC.

As monopolist reduces the output, monopolist will increase the price level to maximize profit.

So correct answer is

b. raise price and lower output