A monopoly firm is charging the price the market will bear at a level of output where MC equals $22 and is increasing, MR equals $20, and average variable cost equals $17. To maximize profits, what action should the firm take?

Question

Quizplus · Accepted Answer

The firm is currently producing at a level where marginal revenue (MR) is less than marginal cost (MC), which means that producing more units would lead to a decrease in profits. Thus, the firm should decrease its output. At the same time, the firm should increase its price because it is already charging the price the market will bear. By decreasing its output and increasing its price, the firm can increase its profit.

A Monopoly Firm Is Charging the Price the Market Will