When a monopolist increases the amount of output that it produces and sells, the price of its output
A)stays the same.
B)increases.
C)decreases.
D)may increase or decrease depending on the price elasticity of demand.

Question

Quizplus · Accepted Answer

A monopolist has market power and can control prices. When it increases the amount of output, it floods the market with more goods which creates a surplus. This surplus puts downward pressure on prices, so the price of its output decreases. This happens because the monopolist is producing at a point of diminishing marginal returns where the additional unit produced adds less to total revenue than the previous unit. Therefore, the only way for the monopolist to maximize profits is to decrease the price of its output.

When a Monopolist Increases the Amount of Output That It