If a monopolist is producing a quqnity that generates MC=Mr,then profit:
a) is maximized
b) is maximized only if MC=p
c) can be increased by increasing production
d) can be increased by decreasing production
The correct answer is a) Profit is maximized if a monopolist is producing a quantity that generates marginal cost (MC) equal to marginal revenue (MR).
To understand why, let's break it down:
1. Monopoly: A monopolist is the sole provider of a good or service in the market, which means it has control over the supply and price.
2. Marginal Cost (MC): MC represents the additional cost required to produce an additional unit of the good or service. It is calculated by dividing the change in total cost by the change in quantity produced.
3. Marginal Revenue (MR): MR is the additional revenue generated by selling an additional unit of the good or service. In a monopoly, since the monopolist is the only seller, MR is equal to the price (P) of the good or service.
Now, let's analyze the options:
a) Profit is maximized: If a monopolist wants to maximize its profit, it needs to produce at the quantity where MC equals MR. Why? Because if MC is lower than MR, it means that the additional cost of producing another unit is less than the additional revenue that would be generated. Therefore, it would be profitable to increase production. On the other hand, if MC is higher than MR, it means that the additional cost is higher than the additional revenue, and it would be more profitable to decrease production. Thus, maximizing profit requires setting MC equal to MR.
b) MC equals p: This statement is not entirely accurate. In a perfectly competitive market, where a monopoly doesn't exist, MC would equal the price (P). However, in a monopoly, since the monopolist has market power, MC does not necessarily equal the price. The monopolist has the ability to set the price above MC, generating additional profit.
c) Increased production increases profit: This statement is not necessarily true. Increasing production can lead to both increasing or decreasing profit, depending on the relationship between MC and MR. If MC is lower than MR, increasing production would generate more revenue than cost, resulting in increased profit. However, if MC is higher than MR, increasing production would generate more cost than revenue, resulting in decreased profit.
d) Decreased production increases profit: This statement is not necessarily true either. If MC is lower than MR, decreasing production would reduce costs more than the reduction in revenue, resulting in decreased profit. However, if MC is higher than MR, decreasing production would reduce costs less than the reduction in revenue, resulting in increased profit.
In summary, a monopolist maximizes profit by producing the quantity where MC equals MR (option a). This ensures that the additional cost and additional revenue are balanced, leading to the highest possible profit.