Question

Why would a monopoly firm never produce in the inelastic portion of its demand curve?
Explain. Use an example to illustrate your explanation.

Answer 1

A monopoly will maximize the profit at the point where the marginal cost and the marginal revenue are equal. The revenue of any firm will maximize at the point where the marginal revenue is zero. At this point the demand for the good will be unit elastic.

If the firm went beyond to produce at the point where the demand is inelastic the marginal revenue will be in negative, to maximize the profit as a monopoly the firm will have to match the MC and the MR and the MR being in negative it is impossible for the marginal cost to be negative. Hence, the firm will stick to producing at the point where the MR and the MC are equal and the MC will always be positive. so the MR has to be positive and the production will be at elastic portion.