CFA Practice Question
Consider a monopolist who faces a downward sloping demand curve. Which of the following is correct?
A. The monopolist produces (and sells) till the point where the marginal revenue = marginal cost. If the monopolist produces (and sells) a unit beyond this point, the amount of consumer surplus increases more than the amount by which the monopolist's surplus decreases.
B. The monopolist produces (and sells) till the point where the marginal revenue = marginal cost. If the monopolist produces (and sells) a unit beyond this point, the amount of consumer surplus increases less than the amount by which the monopolist's surplus decreases.
C. The monopolist produces (and sells) till the point where the price = marginal cost. If the monopolist produces (and sells) a unit beyond this point, the amount of consumer surplus increases more than the amount by which the monopolist's surplus decreases.
Explanation: To maximize profit, the monopolist will produce till the point where marginal revenue = marginal cost. However, at this point there is a deadweight loss, that is too little of the product is being produced, and the sum of the monopolist's surplus and consumers' surplus is not being maximized. Producing one more unit will increase this sum, though it will reduce the monopolist's surplus. With even more production this increase will continue till the point where marginal cost = marginal benefit (the benefit obtained by the consumer who obtains the least benefit from consumption of one unit of the product).
User Contributed Comments 1
| User | Comment |
|---|---|
| Emanco | Hard one! |