-Refer to the above figure. Suppose this industry was perfectly competitive and then merged into one monopolistic firm. The monopoly would
A) raise price from P1 to P2.
B) reduce output from Q3 to Q1.
C) reduce output from Q2 to Q1 and raise price from P3 to P4.
D) raise price from P1 to P4.

Question

-Refer to the above figure. Suppose this industry was perfectly competitive and then merged into one monopolistic firm. The monopoly would
A) raise price from P1 to P2. 
B) reduce output from Q3 to Q1. 
C) reduce output from Q2 to Q1 and raise price from P3 to P4. 
D) raise price from P1 to P4.

Quizplus · Accepted Answer

In a monopolistic market, the firm would seek to maximize its profits by reducing the output to where marginal cost equals marginal revenue (moving from Q2 to Q1) and raising the price to the highest amount consumers are willing to pay for that quantity (from P3 to P4). This is because a monopoly has the market power to set prices above competitive levels and restrict output to increase its profits.

-Refer to the Above Figure