Suppose a monopolist's costs and revenues are as follows: ATC = $50; MC = $45; MR = $35; P = $55. The firm should
A) increase output and decrease price.
B) decrease output and increase price.
C) not change output or price.
D) shut down.

Question

Quizplus · Accepted Answer

The monopolist is currently producing where MR = MC, which is a level of output where the firm is not maximizing profit. To maximize profit, the firm should produce where MR = MC and charge a price that corresponds to that quantity on the demand curve. In this case, the profit-maximizing quantity is below the current level of output, so the firm should decrease output. Since the demand curve is above the ATC at the profit-maximizing quantity, the firm can charge a higher price. Therefore, the firm should decrease output and increase price, which corresponds to choice B.

Suppose a Monopolist's Costs and Revenues Are as Follows: ATC