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 ways:
A. P remains constant, Q remains constant
B. P remains constant, Q increases
C. P increases, Q decreases
D. P decreases, Q increases
E. P decreases, Q remains constant

Answer 1

Answer:

The correct option is D. P decreases, Q increases.

Explanation: When the marginal cost and average cost of production are reduced, this will lead to a reduction in the price of the final product or service.

Also, in introducing a technological innovation that lowered the costs of production, what the monopolist has succeeded in achieving is that the quantity of output will be driven up, as it will now cost less to produce the same unit, then more units can be conveniently produced.

Therefore, the price will reduce, but this will not be a problem because the monopolist will make up for this by increasing the quantity of output. This will ensure that the revenue generated will either remain at the same level as before, or it will surpass the level as before.

Answer 2

Answer:

The answer is option D) P decreases, Q increases

A monopolist introduces a technological innovation that lowers the marginal cost and average cost of production. The price decreases and Quantity increases.

Explanation:

Marginal cost is the the change in total production cost as a result of producing an additional unit

Average cost is the ratio of total cost and total output

When marginal cost increases, average cost follow suit and vice versa

Marginal Cost is usually lower in a large company that spreads its cost across larger amount of goods thereby reducing the price of the product.

That is why smaller companies that produce less charge more because their production cost is not as efficient as larger companies.

Therefore, when a monopolist introduces a technological innovation that lowers the marginal and average cost of production, the price of the good will reduce and the level of output will increase.