Question

Alyssa is a wholesale flower distributor. She sells her flower to all the finest florists in town. Nobody has flowers as beautiful as Alyssa's. As a result, hers is the only business in town that sells flowers to florists. Assuming that Alyssa is maximizing her profit, which of the following statements is true?

A) Flower prices will exceed marginal cost

B) Flower prices will be less than marginal revenue

C) Flower prices will be less than marginal cost

D) Costs are irrelevant to Alyssa because she is a monopolist  

Answer 1

Monopoly is a market condition under which there is only one seller in the market. In the question, it is given that Alyssa's flowers are better than others and she is the sole seller of the flowers in the whole town that means she has a monopoly in the market. So, as Alyssa has a monopoly, she will sell the product till marginal revenue is equivalent to marginal cost i.e. MR = MC and at that point price will be more than both marginal cost and marginal revenue.

A). As we have discussed above, that a monopolist will produce where MR=MC and at that point prices will be more than marginal cost. Hence, this option is correct i.e. Flower prices will exceed marginal cost.

B). Marginal revenue is the additional revenue the firm earns by selling an additional unit of output and a monopolist firm produces output where MR=MC. So, if the price is less than Marginal revenue that means it is less than marginal cost also, so the firm has no incentive to produce output here, as the firm is making a loss under this condition. Hence, this option is incorrect that prices will be less than marginal revenue.

C). Under a monopoly, prices are always above marginal revenue and marginal cost as we have discussed above. Hence, this option is incorrect.

D). Even if a firm is a monopolist, it still produces output where MR=MC. For them too cost matters of producing each output. Hence, this option is incorrect.