A monopolist finds the price-output combination that maximizes its profits by
A) equating total revenue and total cost.
B) equating marginal revenue and marginal cost.
C) finding the combination for which the difference between marginal revenue and marginal cost is the greatest.
D) equating price and marginal cost.

Question

Quizplus · Accepted Answer

For a monopolist, the profit-maximizing price and output level occurs where marginal revenue (MR) equals marginal cost (MC). This is because the monopolist can only sell its output at the market price, and as the monopolist sells more output, the price will decrease. Therefore, to sell more output, the monopolist must lower the price, leading to a lower marginal revenue. In order to determine the optimal output level, the monopolist will choose the level of output where the marginal revenue from selling an additional unit is equal to the marginal cost of producing that additional unit, as this is the point where the additional revenue gained from selling an additional unit is exactly equal to the additional cost of producing it.

A Monopolist Finds the Price-Output Combination That Maximizes Its Profits