WHEN A SINGLE PRICE MONOPOLIST MAXIMIZES PROFITS,PRICE IS GREATER THAN MARGINAL COST.IN OTHER WORDS BUYERS ARE WILLING TO PAY MORE FOR ADDITIONAL UNITS OF OUTPUTTHAN THE UNITS COST TO PRODUCE.GIVIN...

WHEN A SINGLE PRICE MONOPOLIST MAXIMIZES PROFITS,PRICE IS GREATER THAN MARGINAL COST.

IN OTHER WORDS BUYERS ARE WILLING TO PAY MORE FOR ADDITIONAL UNITS OF OUTPUTTHAN THE UNITS COST TO PRODUCE.GIVIN THIS,WHY DOESNT THE MONOPOLIST PRODUCE MORE?

Asked on by rogerarnold

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

All firms in whatever market structures, want to maximize their profits or minimize their losses.  In all market structures, this is done by producing at the quantity where the marginal revenue gained from selling the last unit produced is the same as its marginal cost (the MR=MC point).  This is the only thing that matters.

So, when a monopoly is producing at that point, it is making the most possible money.  If it produces more, it will start making less profit than it would if it stayed at the MR=MC point.

cathylatham's profile pic

cathylatham | High School Teacher | eNotes Newbie

Posted on

Understanding the monopolist's behavior is important: A monopolist's marginal revenue (MR) is always less than the price of its good.  Also, the MR for monopolies is different than the MR for other firms and markets- it has two effects on total revenue.  There is the output effect where the more output that is sold, so quantity is higher.  There is also the price effect.  Eventually, as production increases, MR can become negative because as the price falls, an extra unit of output can affect the firm's total revenue (to a negative number) even though the firm is selling more units.

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