If a monopolist is producing a quantity where marginal revenue is equal to $16 and the marginal cost is equal to $17,the monopolist should ________ to maximize profits.
A) increase production and lower the price
B) decrease production and increase the price
C) continue producing at the current price
D) increase production and increase the price
E) decrease production and decrease the price

Question

Quizplus · Accepted Answer

When marginal revenue is less than marginal cost, the firm is producing at an output level where the additional cost of producing one more unit is greater than the additional revenue earned from selling one more unit. As a result, producing more units will result in a decrease in profit. Therefore, the monopolist should decrease production to increase marginal revenue until it is equal to marginal cost. This will maximize the monopolist's profits. In this case, decreasing production will increase the price, since the monopolist has market power and can charge a higher price for a lower quantity of output.

If a Monopolist Is Producing a Quantity Where Marginal Revenue