Final answer:
A pure monopoly should produce and sell the fifth unit if the marginal cost of producing that unit is less than or equal to the marginal revenue of $0.75, which ensures profits are not reduced.
Step-by-step explanation:
If a firm holds a pure monopoly in the market and can sell 4 units of output at a price of $2.00 per unit and 5 units at $1.75 per unit, it will produce and sell the fifth unit only if the marginal cost of producing the fifth unit is less than or equal to the marginal revenue generated from selling the fifth unit.
Let's calculate the marginal revenue (MR) for the fifth unit. The total revenue for selling four units is $8 (4 units * $2/unit), and the total revenue for selling five units is $8.75 (5 units * $1.75/unit). The MR of the fifth unit is therefore the difference, which is $0.75 ($8.75 - $8).
The firm will produce and sell the fifth unit if the marginal cost (MC) of producing that unit is less than or equal to $0.75. This is because producing additional units adds to overall profits as long as MR ≥ MC. If the MC is higher than $0.75, producing the fifth unit would lead to a decrease in profits.