CFA Practice Question

CFA Practice Question

To increase his profits, a monopolist will
A. understock the market, producing at the level where average total cost equals price.
B. understock the market and raise price above marginal cost.
C. understock the market without minimizing his costs.
Explanation: The monopolist earns a positive profit by restricting output and charging a high price. Thus, at the point of the monopolist's production, the consumer's valuation of the marginal unit is greater than the producer's cost of the unit. This implies that output is too small and price is too high.

User Contributed Comments 4

User Comment
humphrey C is all right too...
kevin but B is better.
volkovv monopolist will try to minimize his costs to the point where MR=MC, but then will charge the price above MC, that's why B is better
colinn C) is wrong. Minimum costs would occur at 0 production, so of course the monopolist is not going to minimize costs. If they meant minimum average total costs, the monopolist would only produce at this if by coincidence it was also the point where MR=MC.

B) is true regardless of the situation.
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