Question

For a profit-maximizing monopolist, which of the following is true?

1) p > mr > mc
2) mr < mc < p
3) p > mr = mc
4) p = mr = mc

Answer 1

The correct answer for a profit-maximizing monopolist is P > MR = MC, where the monopolist sets the level of output where MR equals MC, and then charges a price based on the demand curve, which is above MC, resulting in economic profits.

Step-by-step explanation:

For a profit-maximizing monopolist, the correct statement is that price (P) is greater than marginal revenue (MR), which is equal to marginal cost (MC). This is expressed as P > MR = MC. In other words, the monopolist will set the level of output where MR equals MC to maximize profits, which is the basic profit-maximizing condition for a monopolist.

At this point, the firm can then look up to the demand curve to determine the highest price consumers are willing to pay for that quantity, which will be above the MC cost, resulting in economic profits. Therefore, among the listed options, the third option (p > mr = mc) accurately describes the profit-maximizing strategy of a monopolist.