A monopolist is able to maximize his profits when :a)His output is maximumb)He charges a high pricec)His average cost is minimumd)His marginal cost is equal to marginal revenueCorrect answer is option 'D'. Can you explain this answer?

Question

Answer

A monopolist is able to maximize its profits by setting the price at the level that will maximize its per-unit profit.setting output at MR = MC and setting price at the demand curve's highest point. producing maximum output where price is equal to its marginal cost.

Answer

A monopolist is able to maximize its profits by setting the price at the level that will maximize its per-unit profit.setting output at MR = MC and setting price at the demand curve's highest point. producing maximum output where price is equal to its marginal cost.

Answer

Maximizing Monopoly Profits

To understand why the correct answer is option 'D' - when a monopolist maximizes his profits when his marginal cost is equal to marginal revenue, let's first define a few key concepts:

Monopoly:
A monopoly is a market structure where a single firm is the sole producer and seller of a product or service, with no close substitutes.

Profit Maximization:
Profit maximization is the process by which a firm determines the price and quantity of a good or service that generates the highest possible profit.

Marginal Cost (MC):
Marginal cost is the additional cost incurred by a firm in producing one more unit of a good or service.

Marginal Revenue (MR):
Marginal revenue is the additional revenue earned by a firm from selling one more unit of a good or service.

Explanation:

1. Output:
The correct answer is not option 'A' - output being maximum. While a monopolist can have control over the quantity produced, maximizing output does not necessarily result in maximizing profits. In some cases, producing more units may lead to higher costs and lower marginal revenue.

2. Price:
The correct answer is also not option 'B' - charging a high price. While a monopolist has the power to set prices, charging the highest possible price does not always result in maximizing profits. Higher prices may lead to a decrease in demand and ultimately lower total revenue.

3. Average Cost:
The correct answer is not option 'C' - average cost being minimum. While minimizing average costs can be beneficial for a firm's profitability, it is not the main factor in profit maximization. Profit maximization occurs when the difference between total revenue and total cost is the highest, regardless of the average cost.

4. Marginal Cost and Marginal Revenue:
The correct answer is option 'D' - when a monopolist's marginal cost is equal to marginal revenue. A monopolist maximizes profit by setting the level of output where marginal cost equals marginal revenue.

When marginal cost is less than marginal revenue, increasing production will result in higher overall profit. Conversely, when marginal cost is greater than marginal revenue, reducing production will lead to higher profit. Therefore, the monopolist will continue adjusting the level of output until marginal cost equals marginal revenue, maximizing their profits. At this point, any further increase or decrease in output would result in a decrease in profit.

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