Asked by Keely Messer on May 16, 2024
Verified
Suppose that a monopolist calculates that at its present output level, marginal revenue is $1.00 and marginal cost is $2.00. It could maximize profits or minimize losses by
A) decreasing price and increasing output.
B) increasing price and decreasing output.
C) decreasing price and leaving output unchanged.
D) decreasing output and leaving price unchanged.
Marginal Revenue
The additional financial return from selling a further unit of a good or service.
Marginal Cost
The increase in cost that arises from producing an additional unit of a good or service.
Profits
The financial gain made in a transaction or operation, calculated as the difference between revenue and costs.
- Differentiate between the concepts of marginal revenue (MR) and marginal cost (MC), and understand their influence on the output and pricing strategies of a monopolist.
Verified Answer
NI
Nikkie ImperialMay 21, 2024
Final Answer :
B
Explanation :
To maximize profits or minimize losses, a monopolist should adjust output so that marginal revenue (MR) equals marginal cost (MC). Since MR ($1.00) is less than MC ($2.00), the firm should decrease output to increase MR and decrease MC until they are equal. Decreasing output typically leads to an increase in price due to the inverse relationship between price and quantity demanded in most markets.
Learning Objectives
- Differentiate between the concepts of marginal revenue (MR) and marginal cost (MC), and understand their influence on the output and pricing strategies of a monopolist.
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