For the following two situations fully explain why the monopolist would increase or decrease output. 1....

For the following two situations fully explain why the monopolist would increase or decrease output.

1. Marginal Revenue exceeds Marginal Cost

2. Marginal Cost exceeds Marginal Revenue

Expert Solution

1. Marginal Revenue exceeds Marginal Cost.

Monopoly should increase output.

Explanation :

Firm maximises it's profit where MR equals MC. Marginal revenue is the extra revenue generated by the firm with selling one more extra unit and marginal cost is the extra cost occurred with the production of one more extra unit. So when marginal revenue is greater than marginal cost, production of extra unit is profitable. Because the extra revenue of that one unit is greater than extra cost. So firm should increase production.

2. Marginal Cost exceeds Marginal Revenue.

Firm should decrease production.

Explanation :

Here when marginal cost is more than marginal revenue. So the extra unit is not profitable so we should decrease the production. Because the extra cost occurred with one unit is higher than extra revenue generated by one unit, this extra unit is not profitable thus decrease production will increase profit.

Rahul Sunny answered 7 months ago

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