Chapter 11R, Problem 21MCQ

To determine

The correct option for given situation where monopolist firm’s demand is elastic and it is required to decide about the output level.

Answer to Problem 21MCQ

Option a is correct answer.

Explanation of Solution

Explanation for correct option:

a.

In monopolist firm, if demand is elastic then it means that slighter change in prices will result in greater change in quantity demanded. If monopolist firm’s demand is elastic and it is at MR =MC level then it should maintain the level of output. It is because that is the point at which firm earns maximum profit. Therefore, option a is correct.

Explanation for incorrect options:

b.

If demand is elastic then prices are slightly decreased then firm must increase the quantity as the demand will be changed with greater percentage. Therefore, option b is incorrect.

c.

Monopolist firm can earn maximum profit if P >MR =MC. If firm decrease the output level it should increase the prices to earn profit. Therefore, option c is incorrect.

d.

Every firm seeks to maximize its profit level. If demand is elastic in monopolist firm, then slighter change in price may result into greater change in output level demanded. To maximize the profit firm should not change the prices as it is at point where MR =MC. Therefore, option d is incorrect.

e.

The monopolist firm should not decrease the price if it is at point where MR =MC as it is realizing maximum profit. Therefore, option e is incorrect.

Economics Concept Introduction

Marginal revenue: MR refers to the revenue that is generated by the firm by selling one additional unit in the market.

Demand curve: Demand curve refers to the relationship between price and the output at which consumers are ready to purchase.