A monopoly is producing a level of output such that marginal revenue is equal to

Question

A monopoly is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $10 per unit and is incurring average variable costs of $5 per unit and average total costs of $8 per unit. Given this information, it may be concluded that the firm:

A. is operating at maximum total profit

B. is operating at a loss that could be reduced by shutting down

C. is operating at a profit that could be increased by producing more output

D. is operating at a loss that is less than the loss incurred by shutting down

Explanation / Answer

A. is operating at maximum total profit

ATC of firm is less than the price that monopoly firm charges so firm earns profit. If marginal revenue is greater than the marginal cost then, firm can increase its profit by producing more but in the given question, MR of firm is equal to its MC so firm is earning its maximum profit.

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