Multiple Choice
Which of the following is a disadvantage of the corporate form of business in the context of monopoly markets?
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12. Monopoly
Characteristics of Monopoly
Multiple Choice
In a monopoly market with constant marginal cost, which of the following statements is correct regarding the relationship between marginal cost (MC), marginal revenue (MR), and price (P) at the profit-maximizing output?
A
MC equals price, and MR is greater than MC.
B
MC is greater than MR, and price equals MC.
C
MC equals MR, and price is greater than MC.
D
MR equals price, and MC is less than MR.
Verified step by step guidance1
Recall that a monopolist maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). This is the fundamental profit-maximizing condition: \(\text{MR} = \text{MC}\).
Understand that in a monopoly, the price (P) is set above marginal cost because the firm has market power and faces a downward-sloping demand curve. Therefore, \(\text{P} > \text{MC}\) at the profit-maximizing output.
Recognize that marginal revenue (MR) is always less than the price (P) for a monopolist because to sell an additional unit, the monopolist must lower the price on all units sold, which reduces MR below P.
Combine these insights to conclude that at the profit-maximizing output, the relationship is \(\text{MR} = \text{MC}\) and \(\text{P} > \text{MC}\).
Use this understanding to evaluate the given options and identify the correct statement based on the relationships between MC, MR, and P in a monopoly.
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