Question

Using a graph(s) to support your answer, explain why a monopolist will never produce on the inelastic portion of the demand curve.

Answer 1

Answer

A profit maximizing monopoly will never produce in the lower half of the demand (AR) curve where demand is price inelastic. In order to increase profits, the monopoly will raise price (and move towards the upper half of the demand curve where demand is price elastic) which won't only increase revenues (as gain in revenue because of higher price will exceed the reduction in revenue because of lesser quantity sold) but will also lower total cost (as fewer units will be produced and sold at higher price).

Profits are maximized where marginal revenue of the last unit equals marginal cost. Marginal revenue is positive only when demand is price elastic (upper half of the demand curve) so a profit maximizing monopoly always produces in the upper half of the demand curve where demand is price elastic.