Question

The monopolist wants to maximize its profits or minimize its losses. Analyze the case and give a recommendation as to what the monopolist should do based on the possible recommendations provided below. Explain how you reached this recommendation and the reasons for it.  

Possible Recommendations:

a. Increase production and reduce the price.

b. Decrease production and raise the price.

c. Shut down.

d. The monopoly is currently at the correct position.

Price = 3

Marginal Revenue = 2

Quantity of Output = 1500

Total Revenue = 4500

Total Cost = 4500

Fixed Costs = 0

Average Cost = 3

Marginal Cost = 3

(I think the correct choice is B but please elaborate and explain the reasons why the answer is B and if I am wrong, please give a DETAILED explanation as to why your answer is right.)

Answer 1

At this level we observe that MR is 2 and MC is 3.

For profit maximization, MR should be equal to MC. It is not the case here.

It means that current output level is not the profit maximizing or loss minimizing level.

Now we see that MR<MC.

Output i.e.quantity sold should be reduced to increase MR.

Price and quantity demanded are inversely related. It means price would increase if output decreases.

So, correct option is

b. Decrease production and raise the price.