For a profit maximizing monopolist that charges the same price for all customers, what is the relationship between Price (P), Marginal Revenue (MR), and Marginal Cost (MC)?
Answer (2)
In a profit-maximizing monopolist scenario, Marginal Revenue (MR) is less than Price (P) and equals Marginal Cost (MC) at the profit-maximizing output level. The price charged by the monopolist is typically higher than the marginal cost of production. Therefore, the relationships can be summarized as MR < P and MR = MC.
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In economics, particularly when studying monopolies, it's crucial to understand how a monopolist maximizes profit. This involves analyzing the relationship between Price (P), Marginal Revenue (MR), and Marginal Cost (MC).
Price (P): In a monopoly, a firm is the sole producer of a product. The price is determined by the firm's pricing decision on its demand curve. Price is generally higher than in competitive markets because the monopolist has the power to set it above the marginal cost.
Marginal Revenue (MR): This is the additional revenue the firm earns from selling one more unit of a product. For a monopolist, MR is always less than the price (P) of the product because to sell additional units, the monopolist must lower the price for all units sold, not just the additional one. Therefore, MR decreases as quantity increases.
Marginal Cost (MC): This is the cost of producing one more unit of a product. It is crucial for decision-making in terms of output level.
The profit-maximizing condition for a monopolist is where MR = MC. At this point:
The monopolist determines the optimal output level.
After deciding the quantity produced, the monopolist uses the demand curve to find the highest price consumers are willing to pay for that quantity.
It's important to note:
P > MR when maximizing profits. In a competitive market, firms tend to set P = MC, but because a monopolist faces a downward-sloping demand curve, it sets P > MR.
By setting output where MR = MC, the monopolist can maximize its profits. This also leads to a price that is typically higher than in more competitive markets, which results in a loss of economic efficiency compared to perfect competition.
