The profit of a monopolist facing a downward-sloping demand curve typically
A) rises steadily as the monopolist increases the price.
B) rises steadily as the monopolist reduces the price.
C) first rises as the monopolist reduces the price, then falls.
D) first falls as the monopolist reduces the price, then rises.
E) rises regardless of the direction of the price change.

Question

Quizplus · Accepted Answer

When a monopolist reduces the price, they can sell more units and hence their total revenue will increase. However, as the price keeps decreasing, the increase in quantity sold cannot keep up with the decrease in price and the total revenue starts to fall. Therefore, the profit will first rise as the price is reduced, but eventually, it will fall.

The Profit of a Monopolist Facing a Downward-Sloping Demand Curve