Final answer:
It is true that a monopolist producing at a level where demand is inelastic is not maximizing profits because the firm could increase profits by reducing output until demand becomes elastic, satisfying the MR=MC condition. In a monopolistically competitive market, this will eventually lead to zero economic profits in the long run due to new firms entering the market.
Step-by-step explanation:
The student question pertains to whether it is true or false that a monopolist producing at a level of output where demand is inelastic is not maximizing profits. This statement is true. When demand is inelastic, it means that the quantity demanded by consumers changes very little in response to a price change. If a monopolist raises the price of the good, total revenue increases because the percentage decrease in quantity demanded is less than the percentage increase in price.
In a monopolistic market, if a firm is producing where the demand is inelastic, then it is not maximizing profits. This is because at the inelastic portion of the demand curve, marginal revenue (MR) is negative. The firm can increase its profits by reducing its output until it reaches the point where demand becomes elastic, which is where MR is positive, and hence, where marginal revenue equals marginal cost (MR=MC) which is the profit-maximizing condition. Therefore, for a monopolist to maximize profits, it must operate in the elastic region of the demand curve.
Under monopolistic competition, in the long run, firms might initially earn positive economic profits, enticing entry from new firms and leading to a decrease in demand for the original firm’s product. This competitive process will lead to the reduction in both the original firm’s profit-maximizing price and output levels and eventually result in zero economic profits for all firms in the market.