Final answer:
A monopolist maximizes profits by producing the quantity at which marginal revenue equals marginal cost. In markets where the marginal cost is near zero, such as digital goods, the firm will produce where marginal revenue is also near zero. They will then set the selling price based on the demand curve, which could lead to positive profits if the price exceeds average costs.
Step-by-step explanation:
When a monopolist is seeking to maximize profits, they will produce up to the quantity where marginal revenue (MR) equals marginal cost (MC). In the case of selling e-books, music on iTunes, and downloadable software where MC is essentially zero, the profit-maximizing quantity is where MR also approaches zero.
Although the monopolist’s MR does not equal the price they charge because they have price-setting power, they will choose the quantity where MR = MC, then charge the higher price indicated by the demand curve. If this price is above average cost, it results in positive profits for the monopolist.
A critical factor to consider with monopolies is that, unlike in perfect competition, marginal revenue is generally not equal to the price due to the price-setting ability of the monopolist and the fact that the quantity of output can affect the price.