Question

A simple monopoly will maximize its profit by producing the quantity where

a. price and marginal cost are equal.

b. the demand curve crosses the average cost curve.

c. marginal cost reaches its minimum.

d. marginal revenue equals marginal cost.

Answer 1

Profit(Pr) = TR - TC where TR = Total Revenue and TC = Total Cost.

Maximize : Pr

First order condition :

d(Pr)/dQ = 0 => d(TR - TC)/dQ = 0 => d(TR)/dQ - d(TC)/dQ = 0 => MR - MC = 0 => MR = MC

where Q = quantity, MR = Marginal Revenue and MC = Marginal Cost

Hence According to profit maximizing condition, A monopolist produces that quantity at which MR = MC i.e. Marginal Revenue = Marginal Cost {Note for monopoly, Price is Greater than Marginal revenue}

Hence, the correct answer is (d) marginal revenue equals marginal cost.