Question

A profit maximizing monopolist faces the following information: P = $4, MR = $2, MC = $1.50. The firm should a) shut down b) increase output c) decrease output d) stay at its current level of output

Answer 1

Given Price (P) = $4

Marginal Revenue (MR) = $2

Marginal Cost (MC) = $1.50

The firm should - Answer - (B) INCREASE OUTPUT

The profit maximizing output and price condition is MR=MC. It can be seen from the information provided that the MC is less than the MR. The first order condition tells that the MC should intersect the MR while the MC is increasing. Hence, in this condition if the monopolist wants to reach the equilibrium output and price, it should increase the output so that the MC will further increase and intersect the MR.

Therefore, the answer will be increasing the output so that MC will increase and becomes equal to the MR.