A monopoly can set any price it wants. So why does it still produce at a...

A monopoly can set any price it wants. So why does it still produce at a point where MR = MC, just like a perfectly competitive firm?

Expert Solution

This is because for any firm be it in perfect Competition or monopoly or any other market structure, the firm will be in Equilibrium if it Produces the output corresponding to which the firm's Marginal cost (MC) is equal to Marginal Revenue (MR). This is because if the firm Produces at a point at which MR>MC, then the extra revenue earned by an additional unit produced and sold by a firm is more than the additional cost which the production of this additional unit poses. Hence, it will be profitable to for the Monopolist to further Increase the production as its revenue earned is greater than the cost until MR= MC.

Now , suppose firm is Producing at a point at which MR<MC, it means that the extra revenue earned by an additional unit produced and sold by a firm is less than the additional cost which the production of this additional unit poses. Hence, it will be in the interest of the firm if it reduces the output to minimise its loss, such that MR=MC.

Hence, monopoly will produce at a point where MR=MC just like a Perfectly Competitive firm.

Rahul Sunny answered 2 years ago

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