A monopoly firm is charging the maximum price the market will bear at a level of output where MC equals $10 and is increasing, MR equals $10, and average variable cost equals $9. To maximize profits, what action should the firm take?
A) Increase both output and price.
B) It should not change either the output or the price.
C) Increase output but decrease the price.
D) Decrease output and increase the price.

Question

Quizplus · Accepted Answer

The firm is currently maximizing profits by producing where MC equals MR and charging the highest price the market will bear. If the firm were to increase output and decrease price, it would move to a point where MC is greater than MR and profits would decrease. If the firm were to decrease output and increase price, it would also decrease profits. Therefore, the best action for the firm is to maintain its current output and price level.

A Monopoly Firm Is Charging the Maximum Price the Market