Question

Suppose that an inventor discovers a new chemical compound that can change the color of a person's eyes with no negative side effects. Since she holds a patent on this chemical, she has a monopoly over the sale of the new eye-color treatment. However, she's an inventor, not a businessperson. Which of the following statements explain to her how she should set the price for the eye-color treatment in order to maximize her profits?
a) The inventor should produce an output that maximizes total revenue.
b) The inventor should price her product so that price equals marginal cost for the marginal unit.
c) The inventor should establish the marginal revenue and cost for each additional unit produced.
d) The inventor should produce all the units for which marginal revenue equals or exceeds marginal cost.
e) The inventor needs to establish the demand for her product using market research.
f) The inventor needs to establish the supply for her product using market research.

Answer 1

Answer:

d) The inventor should produce all the units for which marginal revenue equals or exceeds marginal cost.

Explanation:

The inventor has a new and innovative product that can change the color of a person's eyes with no negative side effects.

She now has a monopoly in the market. To maximise her profits she needs to set price of the product so marginal revenue is equal to or greater than the marginal cost.

Marginal revenue is the additional income earned per unit produced, while marginal cost is the additional cost incurred with extra unit produced.

When MR is equal to MC the business breaks even, and when MR is greater than MC the business is making profit.