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Why would a monopoly maximise revenue instead of profit?
Why would a monopoly maximise revenue instead of profit?
Expert Solution
The revenue is obtained by multiplying price with number of units sold. The profit is the difference between revenue and costs.
A monopolist faces inelastic demand curve. The inelastic demand curve shows that any change in price of the product does not change much of the quantity demanded by consumers. The monopolist charges a higher price for its product even with the less quantity sold.
Any fall in price does not decrease much of the quantity demanded. So, the monopolist maximizes the revenue by setting a higher price which is higher than the marginal cost.
As the cost is much less than the price charged by the monopolist, the profit will be high also. So, the monopolist does not need to focus on the profit first because by charging a higher price, the revenue will be maximized which in turn increase the level of profits.
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