Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40.With the reduction in its costs, the firm will probably:
A) lower its price by $40.
B) lower its price, but by less than $40.
C) lower its price, but by more than $40.
D) It is not possible to make a determination from the information given.

Question

Quizplus · Accepted Answer

A profit-maximizing monopoly firm will lower its price after a reduction in its costs, but by less than the cost reduction amount. This is because the firm will aim to increase its profits, which can be achieved by either lowering the price to increase demand or keeping the price and enjoying higher profit margins. Lowering the price by the exact cost reduction amount would result in no change in profit, which is not the firm's objective. Therefore, the most likely scenario is that the firm will lower its price but by less than $40.

Suppose That a Profit-Maximizing Monopoly Firm Experiences a Substantial Technological