Question

A monopolist introduces a technological innovation that lowers the marginal cost and average cost of production. The price of the good and the level of output are most likely to change in which of the following waysPrice Level of Output Profits
A. Remain constant Remain constant Increase
B. Remain constant Increase Remain constant
C. Increase Decrease Increase
D. Decrease Increase Increase
E. Decrease Remain constant Remain constant

Answer 1

Answer:

A Price: Remain constant, Level of Output: Remain constant, Profits: Increase

Explanation:

The image attached shows the different possible solutions. Options can be eliminated based on the problem statement. First, Options B, C and D can be discounted because of the change in output levels. From the information available, the technological innovation lowers marginal cost and cost of production, however it does not affect production time or output levels.

For the two remaining options, A and E, both are possible scenarios based on the information available.

Option E:

Price decreases, output level remains the same and profit remains the same. While this is a possible outcome, as the business is a monopoly, there is no incentive for the monopolist to reduce prices along with cost as they are already the only player in the market. Especially when the reduction in price does not result in increased profit.

Option A:

Price and output level remain constant, while profit increases. This is the most likely outcome as the business is a monopoly. The owner can take advantage of the reduced costs and sell at the same price to increase profits.