Final answer:
A monopolist will avoid choosing a price-quantity combination that reduces total revenue, which happens when marginal revenue becomes negative. They will seek to maximize profits by staying in the positive marginal revenue zone and equating MR with MC.
Step-by-step explanation:
The student has asked about revenue management for a monopolist. A monopolist will never choose a price-quantity combination that causes a decrease in total revenue. This is because for a monopolist, the marginal revenue (MR) decreases as quantity increases, due to the downward sloping demand curve they face.
A unique characteristic of monopoly is that the entity is not a price taker like firms in perfect competition; it has control over the price because it is the sole provider of the good or service in the market.
As a monopolist increases the quantity it sells, it must reduce the price for all units, not just the additional unit sold, which could result in negative marginal revenue past a certain point.
The key takeaway is that a monopolist's total revenue will start low, increase to a point, and then decrease as more units are sold at a lower price, often described as a hill-shaped curve. Therefore, to maximize profits, a monopolist will operate at a level where marginal revenue is still positive and equal to the marginal cost (MR = MC), avoiding the region where MR becomes negative.
We can observe this in an example where at a quantity of 7, marginal revenue becomes zero and turns negative as quantity exceeds 7.
This means the monopolist will aim to sell at a quantity where their total revenue is at its peak before it starts to decline. In this scenario, selling anything above a quantity of 7 would not be in the monopolist's best interest, as it would reduce total revenue and consequently profits.