A monopoly sells 5 units of output at $20. If the MR of the 6th unit is $14, then the price of the 6th unit is
A) also $14.
B) $17.
C) greater than $20.
D) $19.

Question

Quizplus · Accepted Answer

A monopoly maximizes profit by producing where marginal revenue equals marginal cost. Since the MR of the 6th unit is $14, the monopolist will not produce the 6th unit unless the marginal cost is less than or equal to $14. Therefore, the price of the 6th unit will be the price at which marginal cost equals $14. If the marginal cost is less than $14, the monopolist could have produced the 6th unit and earned additional profit. If the marginal cost is greater than $14, the monopolist would not produce the 6th unit as it would not be profitable. Since the monopolist sells the first 5 units at $20 each, the marginal revenue of these units is also $20. Therefore, the monopolist will not produce the 6th unit unless the marginal cost is less than or equal to $14 but greater than or equal to $20 - $14 = $6. If the marginal cost is between $6 and $14, the price of the 6th unit will be between $20 and $14. The only answer choice that satisfies this condition is D, $19.

A Monopoly Sells 5 Units of Output at $20