Suppose a monopolist's costs and revenues are as follows: ATC = $50.00; MC = $45.00; MR = $40.00; P = $55.00. The firm should
A) increase output and decrease price.
B) decrease output and increase price.
C) not change output or price.
D) shut down.

Question

Quizplus · Accepted Answer

Since MC<MR, the monopolist is currently producing output, however, producing one more unit would lead to a loss. Thus, the firm should decrease output to make the marginal cost equal to marginal revenue. This can be achieved by increasing the price. Therefore, the optimal choice for the firm is to decrease output and increase price, which corresponds to choice B.

Suppose a Monopolist's Costs and Revenues Are as Follows: ATC