For an unregulated monopolist, the profit-maximizing quantity will always be?
a.
In the elastic region of the demand curve
b.
Where marginal revenue equals price
c.
Where price equals average total cost
d.
Where price equals marginal cost
e.
Where the marginal cost curve intersects the demand curve
The correct answer and explanation is :
Correct Answer:
a. In the elastic region of the demand curve
Explanation:
An unregulated monopolist maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). However, this quantity will always be in the elastic region of the demand curve.
Why is the elastic region important?
A monopolist faces a downward-sloping demand curve, meaning that to sell more units, it must lower its price. The total revenue (TR) of a monopolist is maximized when demand is unit elastic (elasticity = 1). Beyond this point, if demand is inelastic (elasticity < 1), reducing the price further leads to a fall in total revenue, which would not be optimal for profit maximization.
Since MR is derived from the demand curve, it follows that:
- When demand is elastic (elasticity > 1), MR is positive, and reducing price increases total revenue.
- When demand is inelastic (elasticity < 1), MR becomes negative, meaning that further price cuts decrease total revenue.
A profit-maximizing firm will never operate in the inelastic region of demand because reducing quantity (instead of increasing it) would increase total revenue without raising costs. Therefore, the optimal output level must be where demand is still elastic—which ensures that marginal revenue is positive and can equate to marginal cost.
Why are the other options incorrect?
- b. MR = Price → Only true for perfect competition, not monopoly.
- c. Price = ATC → Happens in long-run equilibrium for monopolistic competition, not monopolies.
- d. Price = MC → True for perfect competition, not monopolies.
- e. MC intersects Demand → Incorrect because the monopolist sets quantity based on MR = MC, not demand.
Thus, the correct answer is (a) in the elastic region of the demand curve.