To maximize its profits, a monopoly should produce the quantity where its marginal cost equals its:
A) average total cost.
B) average variable cost.
C) demand.
D) marginal revenue.

Question

Quizplus · Accepted Answer

A monopoly should produce the quantity where its marginal cost equals its marginal revenue to maximize its profits. This is because in a monopoly, the marginal revenue curve lies below the demand curve, and so the optimal output level is where marginal revenue equals marginal cost, as long as price is greater than average variable cost. If the firm produces less than this optimal level, it can increase profits by producing more (as long as price remains above average variable cost). If it produces more than this level, it will have higher costs than revenue and would negatively impact its profits.

To Maximize Its Profits, a Monopoly Should Produce the Quantity