Suppose we know that a monopolist is maximizing its profits.Which of the following must be true? The monopolist has
A) maximized its total revenue.
B) set price equal to its average cost.
C) maximized the difference between marginal revenue and marginal cost.
D) equated marginal revenue and marginal cost.

Question

Quizplus · Accepted Answer

When a monopolist maximizes its profits, it is producing at a level where marginal revenue (MR) equals marginal cost (MC), because at that point, one more unit of output would increase costs by MC, while also bringing in revenues equal to MR. This ensures that the firm is producing the amount of output where the additional cost of producing one more unit is just offset by the additional revenue gained from selling that unit. Therefore, D is the correct answer. A is not necessarily true, as maximizing profits may not result in maximum revenue. B is not necessarily true, as price does not have to be equal to average cost. C may not be true, as the difference between MR and MC may be positive or negative depending on the level of output produced.

Suppose We Know That a Monopolist Is Maximizing Its Profits