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What should a monopoly due to its price if it is currently operating at an output...

What should a monopoly due to its price if it is currently operating at an output level where

marginal revenue is $40 and marginal cost is $43. Explain your rationale.

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Answer #1

Answer : For monopolist the profit maximizing condition is, Marginal Revenue (MR) = Marginal Cost (MC). If at a monopolist's production level the marginal cost is higher than the marginal revenue then the monopolist should decrease the output level. For monopolist the demand curve is downward sloping. Hence if the monopolist reduce the output level then it charge high price level as monopolist is a price marker not a price taker. Here given that the monopist's marginal cost, $43, is higher than the marginal revenue, $40. So, here to maximize profit the monopolist should reduce the output level. If the monopolist decrease the output level then it will increase the price level. So, here the monopoly should increase the price level to combat the given situation.

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