A monopoly firm is charging the price the market will bear at a level of output where MC equals $22 and is increasing,MR equals $20,and average variable cost equals $17.To maximize profits,the firm should:

Question

Quizplus · Accepted Answer

The profit-maximizing output for a monopoly firm is where MR=MC. In this case, MR=$20 and MC=$22, meaning the firm is currently producing too much output and should decrease production.

To determine the optimal price, the firm should consider its elasticity of demand. Since the firm has monopoly power, it can charge a higher price than the competitive level. However, charging too high of a price will result in a decrease in total revenue due to a significant decrease in the quantity demanded.

Given that the firm is already charging the highest price the market can bear, it should decrease output to increase marginal revenue and raise the price even higher to increase profits. This means the firm should choose to decrease output and increase the price, making option C the correct choice.

A Monopoly Firm Is Charging the Price the Market Will