If the price of a monopoly firm is located on the inelastic portion of its demand curve, to maximize profits it should necessarily:
A)increase output and decrease price.
B)decrease output and increase price.
C)increase output and increase price.
D)not change output or price.
E)do none of the above.

Question

Quizplus · Accepted Answer

When the price of a monopoly firm is on the inelastic portion of the demand curve, it means that the price elasticity of demand is low. In this situation, if the firm were to increase output, the total revenue would not increase enough to compensate for the additional costs involved. Similarly, if the firm reduces output, then it would face a loss in revenue, again not compensating for the reduction in costs. Thus, to maximize profits, the firm should decrease output and increase price, which would lead to an increase in total revenue, contributing to higher profits.

If the Price of a Monopoly Firm Is Located on the Inelastic