Question

A monopoly that attempts to charge the socially desirable price will invariably reduce their economic profit because:_______

Answer 1

Answer:

D

Explanation:

A monopoly that attempts to charge the socially desirable price will invariably reduce their economic profit because average cost and marginal cost are equal.

Answer 2

Answer:

The correct choice is -  Price is equal to the Marginal Cost.

Explanation:

Socially desirable price refers to the point on the graph where the demand (D) stands equal to or intersects the marginal cost (MC). That is MC = D.

The challenge with setting prices like this is that the business in arriving at the price of its product(s) and or service(s) has not taken into consideration the fixed cost to the business. To breakeven, the owner of a business must know its Average Total Cost (which takes into consideration both marginal and fixed costs) and set its prices equal to same. To make a profit however the business must set its prices above the Average Total Cost.

Recall that ATC = MC +  F/Q where

ATC = Average Total Cost

MC = Marginal Cost

F = Fixed Cost

Q =  Quantity of goods produced

D =  Quantity of goods demanded

Cheers