A monopoly firm is charging the price the market will bear at a level of output where MC equals $22 and is increasing, MR equals $20, and average variable cost equals $17.To maximize profits, the firm should:

Question

Quizplus · Accepted Answer

The firm is currently producing at a level where MR=MC, but the price it is charging is higher than the marginal cost. This suggests that the firm has some market power and is charging a price above the competitive level. To maximize profits, the firm should decrease output until MR=MC at a lower level of output. This will reduce costs (since AVC=17<22) and increase the firm's total revenue. At the lower output level, the firm can increase the price because the reduced output will create scarcity and drive up demand for the product. Therefore, the correct choice is to decrease output and increase the price.

A Monopoly Firm Is Charging the Price the Market Will