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In: Economics

explain the process a monopolist goes through to maximize profits.

explain the process a monopolist goes through to maximize profits.

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Expert Solution

A monopolist maximizes profit where marginal revenue is equal to marginal cost.

Marginal revenue refers to the change in total revenue when additional units are sold

Marginal cost refers to the change in the total cost when additional units are produced

Reason for profit-maximization at MR = MC

If MR is greater than MC then it means additional revenue is greater than additional cost which is a profit for a monopolist hence, as a result, he will continue to sell more units till MR becomes equal to MC.

If MR is less than MC then it means additional revenue is less than additional cost which is a loss for a monopolist hence, as a result, he will produce lesser units till MR becomes equal to MC

That's why a monopolist earns a maximum profit at MR = MC

The monopolist graph looks like this

Profit-maximizing quantity is where MR and MC curves are intersecting with each other.

Profit-maximizing price is on the demand curve at the profit-maximizing quantity.

Rahul Sunny answered 7 months ago
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