If a profit-maximizing monopolist finds that marginal cost is increasing and exceeds marginal revenue,it should:
A) increase output and decrease price.
B) increase price and decrease output.
C) decrease both price and output.
D) increase both price and output.

Question

Quizplus · Accepted Answer

If marginal cost exceeds marginal revenue, the monopolist is producing units that are costing more to produce than they are generating in revenue. To maximize profit, the monopolist should reduce output (i.e. decrease number of units produced) to the point where marginal cost equals marginal revenue. This means the monopolist should increase the price of the good to reduce demand and sell fewer units. By doing so, the monopolist can increase profit by selling each unit of output at a higher price, despite selling fewer units overall. Therefore, the best choice is to increase the price and decrease output, as stated in option B.

If a Profit-Maximizing Monopolist Finds That Marginal Cost Is Increasing