In theory, we know that a monopolist basis its price directly off of the demand curve,...

In theory, we know that a monopolist basis its price directly off of the demand curve, but in practice a monopolist cannot 'see' the demand curve. Explain how a monopolist might set prices, even without having explicit knowledge of the shape of the demand curve.

Expert Solution

Answer : The monopolist's profit maximizing output level is that output level where MR (Marginal Revenue) = MC (Marginal Cost). For monopolist MR curve is the half of demand curve. This means that for monopolist the demand curve is the double of MR curve. So, if the monopolist cannot see the demand curve then the monopolist can set it's price level by multiplying the marginal revenue with 2. This means that if the monopolist at it's profit maximizing output level double the marginal revenue then the monopolist get it's demand at that output level which will be the per unit price at that output level. Thus, the monopolist can set it's price level without having explicit knowledge about the shape of demand curve.

Rahul Sunny answered 2 years ago

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