A monopolist determines that at the current level of output the marginal revenue is $3

Marketing Jan 12, 2021

A monopolist determines that at the current level of output the marginal revenue is $3.00 and its marginal cost is $4. What should the monopolist do to increase profits? Explain your answer.

Expert Solution

Monopolistic firms maximize their profits by setting their marginal revenues equal to their marginal cost (.

For the monopolist in our question, the marginal revenue is and the marginal cost is . This means that the firm is not producing at its optimal point since the marginal revenue is less than the marginal cost.

With , we can say that the firm is producing too much and it can do better by reducing its production. The firm should, therefore, reduce its production so that the marginal cost falls and the marginal revenue increases until the marginal revenue is equated to the marginal cost.

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