Question

A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase profit?

1) decrease output until marginal revenue equals marginal cost
2) shutdown if marginal cost exceeds marginal revenue
3) increase output until marginal revenue equals marginal cost
4) increase output until marginal revenue equals zero

Answer 1

A monopolist should decrease its output until marginal revenue equals marginal cost in order to increase profit.

Step-by-step explanation:

A monopolist can determine its profit-maximizing level of output by analyzing the marginal revenue and marginal cost. If the monopolist is producing at a point where marginal cost exceeds marginal revenue, it should reduce its output until marginal revenue equals marginal cost, or MR = MC. This quantity can be easily identified graphically by finding the point where the marginal revenue and marginal cost curves intersect.