Suppose that at the current output level the price received by a monopolist for its good is $10, marginal revenue is equal to $6, and marginal cost is $8. To maximise profit the monopolist should: A. decrease output B. increase output C. keep output constant D. we cannot say without more information
Question
Suppose that at the current output level the price received by a monopolist for its good is 6, and marginal cost is $8. To maximise profit the monopolist should: A. decrease output B. increase output C. keep output constant D. we cannot say without more information
Solution
To maximize profit, a monopolist should adjust its output level until marginal cost equals marginal revenue. In this case, the marginal cost (6). This means that the cost of producing an additional unit of output is greater than the revenue it would bring in. Therefore, to maximize profit, the monopolist should decrease output. So, the answer is A. decrease output.
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