A nondiscriminating monopolist:
a. will never produce in the output range where marginal revenue is positive.
b. will never produce in the output range where demand is inelastic.
c. will never produce in the output range where demand is elastic.
d. may produce where demand is either elastic or inelastic, depending on the level of production costs.
The correct answer and explanation is :
The correct answer is b. will never produce in the output range where demand is inelastic.
Explanation:
A nondiscriminating monopolist maximizes its profit by producing the quantity of output where marginal revenue (MR) equals marginal cost (MC). The monopolist operates on the demand curve for its product, which is typically downward sloping, indicating that it can sell more units only by lowering the price.
The monopolist will consider both the price elasticity of demand and the marginal revenue to determine the optimal output level. The key to understanding why the monopolist will never produce in the inelastic range of the demand curve lies in the relationship between price elasticity of demand and marginal revenue.
Price Elasticity and Marginal Revenue:
- Elastic Demand: When demand is elastic (the absolute value of price elasticity is greater than 1), a decrease in price leads to a proportionally larger increase in quantity demanded, meaning total revenue increases as price decreases. In this range, marginal revenue is positive, and a monopolist can still increase total revenue by lowering the price slightly and increasing the quantity sold.
- Inelastic Demand: When demand is inelastic (the absolute value of price elasticity is less than 1), a decrease in price results in a smaller increase in quantity demanded, meaning total revenue decreases as price decreases. In this range, marginal revenue is negative. If the monopolist were to produce in this range, lowering the price would decrease total revenue, and it would not be profit-maximizing. Therefore, a nondiscriminating monopolist avoids producing in the inelastic portion of the demand curve.
Profit Maximization:
To maximize profit, the monopolist seeks to produce where marginal revenue equals marginal cost (MR = MC). If the monopolist were to produce where demand is inelastic, the marginal revenue would be negative, and the firm would not be maximizing its profit. Therefore, it will never produce in the output range where demand is inelastic, because any reduction in price would reduce total revenue.
In conclusion, answer b is correct because a monopolist will avoid producing in the inelastic portion of the demand curve to avoid negative marginal revenue and reduce total revenue.