A monopoly firm is producing at the output where marginal cost equals $6, marginal revenue equals $9, and average variable cost equals $5. To maximize profits, the firm should:
A)increase both output and price.
B)increase output but decrease the price.
C)decrease output and increase the price.
D)decrease both output and price.
E)decrease output, keeping price constant.

Question

Quizplus · Accepted Answer

The firm should increase output to the point where MR=MC, which is at an output level where marginal cost equals $6 and marginal revenue equals $9. At this output level, the firm is earning a profit since price ($9) exceeds average variable cost ($5). To maximize profit, the firm should increase output (since MR>MC) but decrease price since it is currently charging a price higher than the marginal revenue cost. By reducing the price, the firm can increase demand for its product and sell more units, which will increase its profits.

A Monopoly Firm Is Producing at the Output Where Marginal