Final answer:
A profit-maximizing monopolist will operate where demand is elastic, meaning the price elasticity of demand is greater than 1, to ensure that price reductions lead to sufficiently larger quantity demanded and therefore increase total revenue. The correct answer is option (b)
Step-by-step explanation:
The profit-maximizing monopolist will operate in a price range over which demand is elastic. This is because when demand is elastic, a decrease in price will lead to a proportionally larger increase in quantity demanded, thereby increasing total revenue. In contrast, if demand were inelastic, a decrease in price would not significantly boost the quantity demanded; thus, total revenue would decrease.
A monopolist sets the quantity where marginal revenue (MR) is equal to marginal cost (MC), and then charges the corresponding price on the demand curve. Since the monopolist has market power, it faces the market demand curve rather than the perfectly elastic demand curve that a perfectly competitive firm would face. It can therefore affect the price by adjusting its output level.
When the price elasticity of demand is greater than 1 (elastic demand), a price decrease causes total revenue to increase, which is necessary for profit maximization. Conversely, when elasticity is less than 1 (inelastic demand), a price decrease leads to decreased total revenue, which is not conducive to maximizing profits. The goal is to operate in a range where demand is elastic, ensuring that any reduction in price to sell more units leads to higher overall revenue.