Say a monopolist knew that at the current price for its product demand is inelastic. If marginal costs for this firm are zero, then in order to maximize profits this monopolists should:
A)increase output
B)reduce output
C)keep output at the same level
D)decrease its price

Question

Quizplus · Accepted Answer

A monopolist facing inelastic demand at the current price and with zero marginal costs should consider the following:Inelastic demand means that the percentage change in quantity demanded is less than the percentage change in price. In other words, when prices increase, the total revenue increases because the loss in sales volume is less than proportional to the price increase.
Given that the marginal cost of production is zero, the monopolist does not incur any additional costs for producing more units of the product. Therefore, each additional unit sold at the current price contributes directly to profit, as there is no cost to offset the revenue from selling that unit.
To maximize profits under these conditions, the monopolist should:
B) reduce output.
By reducing the output, the monopolist can increase the price because the demand is inelastic. The increase in price will lead to a less than proportional decrease in quantity demanded, which means that total revenue will increase. Since the marginal cost is zero, the additional revenue from the higher price translates directly into higher profits.
It's important to note that this strategy works specifically because the demand is inelastic and the marginal cost is zero. If either of these conditions were different, the profit-maximizing strategy could also be different.

Say a Monopolist Knew That at the Current Price for Its