In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? It will
A)lower price to expand revenue possibilities
B)restrict output to extract a higher price from customers
C)maintain the current price if profit is still positive
D)increase plant size to lower marginal cost
E)decrease plant size to lower marginal cost

Question

Quizplus · Accepted Answer

If a monopolist's marginal cost suddenly increases, the profit-maximizing strategy would be to restrict output by reducing the quantity supplied in order to extract a higher price from customers as long as the new price is still above the new, higher marginal cost. This is because the monopolist faces a downward sloping demand curve and has the ability to manipulate price due to its market power. By reducing output, the monopolist faces a less elastic demand curve and can charge a higher price to consumers, which would increase total revenue and profits. Lowering the price would lead to a decrease in profits, maintaining the same price could lead to negative or lower profits, and increasing plant size or decreasing plant size would not necessarily lower marginal cost.

In the Short Run, How Will a Profit-Maximizing Monopolist React