Question

Many people believe that pure monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing pure monopoly occurs where ____.

Answer 1

Answer:

The options for this question are the following:

a. marginal cost equals average revenue.

b. marginal revenue equals average cost.

c. average total cost equals average revenue.

d. marginal revenue equals marginal cost.

The correct answer is d. marginal revenue equals marginal cost.

Explanation:

The pure monopoly arises when there is a total absence of competition, due to independent entry barriers to the company's competitive capacity.

A single company offers a product that has homogeneous characteristics, which has no substitutes and for that reason has a large number of buyers. There are also economic, technological or legal barriers that prevent the entry of potential competitors. That is, there are barriers to entry.

In general, a monopoly situation occurs in the market when a single company controls the level of production and price of a product in the market. We could say that this single company has the ability to determine the price to be charged for that product and will have the power to decide the amount of production it will offer to the market.

Answer 2

Answer:

As a general rule, all companies maximize their accounting profits when their marginal revenue (MR) = marginal cost (MC), and at the same time their economic profit = $0

Explanation:

Since monopolies control the market, they can actually make economic profits by selling a lower quantity since MR > MC, but that also means that their accounting profit is not maximized.

Economic profit = accounting profit - opportunity costs

If economic profits exist, it means that the company is not maximizing the use of its resources, and could actually be using them to do something else and earn more money.