A monopolist earning economic profit in the short run determines that, at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?

Question

Quizplus · Accepted Answer

The monopolist operates where Marginal Revenue (MR) = Marginal Cost (MC) to maximize profit. In this case, MR = $23 and MC = $30. Since MC is higher than MR, the firm is not producing at the profit-maximizing level of output.

To increase profit, the firm should adjust its output level. However, it should consider the effect of changing output on marginal revenue and marginal cost. If the firm increases output, it will raise marginal revenue but also marginal cost. On the other hand, if it reduces output, it will lower marginal revenue but also marginal cost.

Since marginal cost is already higher than marginal revenue, reducing output will be more beneficial than increasing it. Therefore, the firm should reduce its output level to maximize profit. Alternatively, it could raise its price to increase profit, but this would require demand to be sufficiently inelastic so that the increase in price offsets the decrease in quantity demanded.

A Monopolist Earning Economic Profit in the Short Run Determines