The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants.The firm sells its pennants for $10 each.We can conclude that the XYZ Company is producing a level of output at which:
A) average total cost equals $10.
B) average total cost is greater than $10.
C) marginal revenue equals $10.
D) marginal cost equals marginal revenue.

Question

Quizplus · Accepted Answer

The profit-maximizing level of output for a monopolist occurs where marginal cost equals marginal revenue. Since the firm sells each pennant for $10, this also means that the marginal revenue for the last pennant produced and sold is $10. Therefore, the firm will produce and sell up to the point where marginal cost equals $10, and since the firm is profit-maximizing, it will charge a price equal to the demand curve, which in this case is $10. Hence, the correct answer is D: marginal cost equals marginal revenue.

The XYZ Company Is a Profit-Maximizing Firm with a Monopoly