A monopolist faces a downward-sloping demand curve and has fixed costs so large that when she maximizes profits with a positive amount of output, she earns exactly zero profits.At this positive, profit-maximizing output,
A)there are decreasing returns to scale.
B)demand is price inelastic.
C)marginal revenue is greater than marginal cost.
D)price equals marginal cost.
E)average total cost is greater than marginal cost.

Question

Quizplus · Accepted Answer

In this scenario, the monopolist is covering all costs (including the large fixed costs) and breaking even at the profit-maximizing output level. This means that the price at which the monopolist is selling the product is equal to the average total cost (ATC) at that output level. Since the monopolist is maximizing profit, marginal cost (MC) equals marginal revenue (MR), and for profit maximization under monopoly, price is above MC. Therefore, ATC, which includes fixed costs spread over the units produced, is greater than MC at the profit-maximizing output. This does not necessarily imply decreasing returns to scale (A), demand inelasticity (B), MR > MC (C, which contradicts profit maximization where MR = MC), or price equals MC (D, which is typical for perfect competition, not monopoly).

A Monopolist Faces a Downward-Sloping Demand Curve and Has Fixed