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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

A profit-maximising monopolist is producing where marginal cost (MC) is ₹30 and marginal revenue (MR) is ₹50 at the current output. Which action should it take?

The monopolist should increase output. Because marginal revenue of ₹50 exceeds marginal cost of ₹30, each additional unit adds ₹20 to profit. It should keep expanding until marginal revenue falls and equals marginal cost, where profit is maximised.

  1. AReduce output, since MR exceeds MC
  2. BIncrease output, since the extra unit adds more to revenue than to costCorrect
  3. CKeep output unchanged, since profit is already maximised
  4. DRaise the price without changing output

Explanation

Profit is maximised where MR equals MC. At present each extra unit brings ₹50 of revenue and costs ₹30, adding ₹20 to profit, so output should expand until MR falls to MC. Reducing output would be correct only if MC exceeded MR.

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