Question

because a monopolist faces the market demand curve , it

a/ must seek the price that maximizes profits.

b/ has no limit on the prices it can charge .

c/ has absolute market power.

d/ can raise price as high as it wants and still sell its product.

Answer 1

Correct option: a. must seek the price that maximizes profits.

The demand curve of the monopolist is same as the market demand curve because monopolist is the only firm in the market. If the monopolist will charge too high price then the quantity sold will be low & the revenue received will be lower whereas if the monopolist will charge a lower price then quantity sold will be higher, but the revenue received will be lower in this case also. So, a monopolist needs to set a balance between price & quantity sold that helps it to maximize the profits. The profit maximizing quantity of the monopolist is determined by the intersection of marginal revenue & marginal cost & then the price that is consistent with this quantity is shown by the demand curve.