Question

A monopolistic firm is currently producing 3,500 units of output; price is $100, marginal revenue is $7, average total cost is $5.50, marginal cost is $4.50, and average variable cost is $3.75. The firm should

a. raise price because the firm is losing money.

b. keep the price the same because the firm is producing at minimum average variable cost.

c. raise price because the last unit of output decreased profit by $5.50.

d. lower price because the next unit of output increases profit by $2.50.

A firm with market power is producing a level of output at which price is $60, marginal revenue is $45, average variable cost is $50, and marginal cost is $57. In order to maximize profit, the firm should

a. decrease price.

b. increase price.

c. keep price the same.

d. increase output.

e. shut down.

Answer 1

Answer
The monopolist maximizes profit at MR=MC
here The MR=7 and MC=4.5
so the output should be increased because it will increase profit by MR-MC=7-4.5=$2.5
Option D

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Answer
Option b
Increase price
The firm with market power produces at MR=MC
where the MR curve is downward sloping and MC curve is upward sloping
and here,
MR<MC
so the firm should reduce the output and increase the price to decrease the loss per unit
the loss per unit =57-45=$12