To maximize profit, a dominant firm sets residual demand equal to marginal cost.

Question

Quizplus · Accepted Answer

This is the basic rule of profit maximization for a monopolist or a dominant firm in a market with no or limited competition. By setting the price where marginal cost equals marginal revenue, the firm can achieve maximum profits by producing at the point where the cost of an additional unit equals the revenue it generates. This is known as the profit-maximizing quantity or output level.

To Maximize Profit, a Dominant Firm Sets Residual Demand Equal