A monopoly sells 10 units of output at $10. If the MR of the 11th unit is $4.50, then the price of the 11th unit is
A) also $10.
B) $9.50.
C) greater than $10.
D) $7.25.

Question

Quizplus · Accepted Answer

A monopoly's profit-maximizing output level occurs where MR=MC. If the MR of the 11th unit of output is $4.50 and the monopoly is selling 10 units at $10, then the marginal revenue from selling the 11th unit is less than the price of the 10th unit ($10).

To sell the 11th unit, the monopoly must lower the price on all units sold, not just the 11th unit. This is because the monopoly is a price maker and can only sell each unit for the same price. Therefore, the price of the 11th unit is lower than $10.

The monopoly will continue producing more units until the marginal cost equals the new marginal revenue. So, the monopoly would produce and sell the 11th unit as long as its marginal cost is less than or equal to $4.50.

Assuming that the marginal cost of producing and selling the 11th unit is less than $4.50 but greater than $0, the monopoly would lower the price to $9.50 to sell the 11th unit, which would increase its total revenue.

A Monopoly Sells 10 Units of Output at $10