A profit-maximizing monopoly will produce where which of the following is true? [Select all answers that are true]Group of answer choicesMarginal revenue is less than the priceMarginal revenue is equal to the marginal costMarginal revenue is positive
Question
A profit-maximizing monopoly will produce where which of the following is true? [Select all answers that are true]Group of answer choicesMarginal revenue is less than the priceMarginal revenue is equal to the marginal costMarginal revenue is positive
Solution
A profit-maximizing monopoly will produce where the following are true:
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"Marginal revenue is less than the price" - This is because a monopoly faces a downward-sloping demand curve, meaning that to sell additional units, it must lower the price. Therefore, the price of the last unit sold (which is the price for all units sold) is greater than the additional revenue gained from selling that unit (marginal revenue).
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"Marginal revenue is equal to the marginal cost" - This is the rule for profit maximization. A monopoly, like any firm, will maximize profit by producing up to the point where the cost of producing an additional unit (marginal cost) is equal to the additional revenue gained from selling that unit (marginal revenue).
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"Marginal revenue is positive" - This is generally true for a profit-maximizing firm. If marginal revenue were negative, it would mean that selling an additional unit would reduce total revenue, which would not be a profit-maximizing strategy.
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