Chapter 9: Problem 2

A monopolist sets the a. price at which marginal revenue equals zero. b. price that maximizes total revenue. c. highest possible price on its demand curve. d. price at which marginal revenue equals marginal cost.

Short Answer

Expert verified

The correct answer is option d. A monopolist sets the price at which marginal revenue equals marginal cost, as this is the point at which profit is maximized.

Step by step solution

Option a: Price at which marginal revenue equals zero

A monopolist would not set the price where the marginal revenue is zero, because MR is the additional revenue generated with the sale of each additional unit. If MR is zero, there's no additional benefit for the monopolist to sell more products or services. However, it doesn't help in determining the profit-maximizing price.

Option b: Price that maximizes total revenue

The total revenue maximization occurs when the monopolist sets the price at a level where the price elasticity of demand (PED) is unit elastic. But, maximizing total revenue isn't necessarily the same as maximizing profit. Profit also takes into account the cost of production, and a monopolist's goal is to maximize profit rather than just total revenue.

Option c: Highest possible price on its demand curve

If a monopolist sets the price at the highest possible level on its demand curve, it would maximize the price per unit sold. However, this would significantly decrease the quantity of units it would sell, as many consumers would not be willing to pay that high price. Although the price per unit would be high, profits likely will not be maximized here, as the cost of production and the total sold units need to be considered for profit maximization.

Option d: Price at which marginal revenue equals marginal cost

This is the right answer. A monopolist aims to maximize its profit, and the profit-maximizing condition occurs when marginal revenue (MR) equals the marginal cost (MC). At this point, the additional revenue gained from the sale of one more unit of a product equals the additional cost of production for that unit, achieving the maximum level of profit. Thus, a monopolist sets the price at which marginal revenue equals marginal cost. The correct option is \(d\).

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!