If a firm holds a pure monopoly in the market and is able to sell 5 units of output at $4.00 per unit and 6 units of output at $3,90 per unit, it will produce and sell the sixth unit if its marginal cost is
A) $3.90 or less
B) $3.40 or less
C) $3.50 or less
D) $4.00 or less

Question

Quizplus · Accepted Answer

The firm will produce and sell the sixth unit if the marginal cost is less than or equal to the marginal revenue. The marginal revenue for the sixth unit is the change in total revenue from selling the sixth unit, which is $3.90 (price of the sixth unit) - $4.00 (price of the fifth unit) = -$0.10. However, since the total revenue increases from $20.00 (5 units at $4.00) to $23.40 (6 units at $3.90), the marginal revenue is $3.40. Therefore, the marginal cost must be $3.40 or less.

If a Firm Holds a Pure Monopoly in the Market