How high should a monopoly set its prices in order to maximize profits? When you post a response to this question, place it in the context of one of the following examples: A geographically isolated gas station

Profit maximization is an economics idea that a firm should produce to the point where marginal costs equal marginal revenue. Marginal means additional and firms can calculate the additional cost of a good or service and the additional revenue from its sale. A firm holding a monopoly will not voluntarily produce goods when the marginal costs exceed the marginal revenue. In other words, it would not make sense to produce a product at a higher cost than you could sell it. Generally, monopolies offer a single price to all consumers when they aren't engaging in price discrimination. Since the firm will have to lower its price to sell more units, eventually the marginal revenue facing a monopoly becomes negative.

A geographically isolated gas station has some monopoly pricing power due to its location. It should set a markup appropriate to the regional demand and understand it will sell fewer gallons of gas, however will earn a higher profit on each of those gallons. This is different than a competitive market in a large city where the gas station will have to price its gas at the equilibrium price already in the market.

A concert on campus should consider its amount of seats or capacity. It should charge a price that equals the demand level of capacity. Also, if the concert is in an arena or open seating environment will change the promoter's ability to charge a marked up price. The profit maximizing quantity is the size of the arena or area holding the concert and the price should be set so all seats are purchased but at the markup price.

During sporting events there is a monopoly set by the promoter. Often only a single seller sells the soda. The price should be set higher than the competitive price outside the arena and the size and popularity of the event will determine how large the markup can be. The same can be said for the prescription drugs, which should be produced using profit maximization, MC=MR, but priced based on the demand. The demand will depend the effectiveness of the drug and the number of consumers who would be willing to buy it. If the drug prevents something specific and catastrophic, the mark up can be higher because the demand will be higher for that drug.