If marginal costs increase, a monopolist will:
A) decrease price and increase output.
B) decrease both price and output.
C) increase price and decrease output.
D) increase both price and output.
E) keep both price and output at the same level.

Question

Quizplus · Accepted Answer

As marginal costs increase, it becomes more costly for the monopolist to produce each additional unit of output. Therefore, the monopolist will want to decrease its output in order to avoid incurring excessive costs. In order to maintain its market power, however, the monopolist will want to increase its price to offset the lost revenue due to the decrease in output. Therefore, the monopolist will increase price and decrease output.

If Marginal Costs Increase, a Monopolist Will