Suppose a monopolist is producing a level of output such that MR MC.Which of the following best describes what will happen as the firm moves to its profit-maximizing equilibrium?
A)Marginal revenue will rise and marginal cost will fall.
B)Marginal cost and marginal revenue will both rise.
C)Marginal revenue will fall and marginal cost will rise.
D)Marginal cost and marginal revenue will both fall.

Question

Suppose a monopolist is producing a level of output such that MR > MC.Which of the following best describes what will happen as the firm moves to its profit-maximizing equilibrium?
A)Marginal revenue will rise and marginal cost will fall.
B)Marginal cost and marginal revenue will both rise.
C)Marginal revenue will fall and marginal cost will rise.
D)Marginal cost and marginal revenue will both fall.

Quizplus · Accepted Answer

If the monopolist is already producing at an output level where MR > MC, then increasing output will lead to a decrease in MR (due to the downward-sloping demand curve) and an increase in MC (due to the law of diminishing returns). Therefore, the monopolist will not continue to expand output beyond the current level, but will instead produce at the level where MR = MC to maximize profits. At this equilibrium, both MR and MC will be lower than they were before the increase in output, but the monopolist will be producing at the optimal level where the marginal benefit (MR) of producing an additional unit of output is equal to the marginal cost (MC) of producing that unit.

Suppose a Monopolist Is Producing a Level of Output Such