A monopoly is producing output so that the average total cost is $30,the marginal revenue is $40,and the price is $50.If ATC is at its minimum level and the ATC curve is U-shaped,to maximize profits,this firm should:
A) increase output.
B) reduce output.
C) do nothing;it is already maximizing profits.
D) shut down.

Question

Quizplus · Accepted Answer

For profit maximization, a monopoly should produce where marginal revenue (MR) is equal to marginal cost (MC). In this case, no information about MC is given, but the fact that the ATC curve is U-shaped implies that MC intersects with both AVC and ATC at their respective minimum points. This means that if the firm is producing at a point where ATC is at its minimum level, it is also producing at a point where AVC is at its minimum level.

Therefore, the firm should continue to produce as long as the price (and thus, marginal revenue) is greater than or equal to AVC. In this case, the price is $50 and the average total cost is $30, so the firm is earning economic profit. However, since the marginal revenue is greater than the average total cost (i.e. MR > ATC), the firm can increase profits by increasing output. As long as MR remains greater than ATC, increasing output will continue to add to the firm's profits. Therefore, the best choice is to increase output.

A Monopoly Is Producing Output So That the Average Total