CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

A profit-maximizing monopoly will produce an output where demand is ______.
A. inelastic
B. unitary elastic
C. elastic
Explanation: A single-price monopoly never produces an output at which demand is inelastic. If it did produce such an output, the firm could increase total revenue, decrease total cost, and increase economic profit by decreasing output.

User Contributed Comments 5

User Comment
damianpd Can some explain the answer explanation a bit further please?
Honore But would it not make more sense for the firm to keep dropping the price until price becomes uni-elastic since as long as it is in the elastic zone they can increase total revenue by decreasing the price?
gaetmichel You re right Honore, Monopoly should produce output when D is unit elastic. Otherwise:
- producing less -> D is too elastic (Q decreases too much compared to thr price increase)
- producing more -> D is too inelastic (Q increases, but not enough to off set the decrease in price)
Dboy I had the same question.. This site helps explain it(look at the graphs about a page down, click the button "elasticity"): amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,+ marginal+revenue+and+demand+elasticity
jorellana9 Thanks Dboy, the website was super super helpful and gave a much more detailed explanation. Unfortunately I couldn't copy and paste the link this helpful link so I had to manually type it in to my web browser
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