Refer to Figure 15-4. At what price will the monopolist set its product in order to maximize profit?

• A. The price where marginal revenue equals average revenue
• B. The price corresponding to the quantity where marginal cost equals marginal revenue
• C. The price where demand equals marginal cost
• D. The price where average total cost equals marginal cost

Answer: (B)

Verified step by step guidance

1. Understand that a monopolist maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). This is the fundamental profit-maximizing condition for any firm, including a monopolist.
2. Identify the quantity where the marginal revenue curve intersects the marginal cost curve on the graph. This quantity is the profit-maximizing output level.
3. Once the profit-maximizing quantity is found, move vertically up to the demand curve (also called the average revenue curve for a monopolist) to find the price consumers are willing to pay for that quantity.
4. The price at this point on the demand curve is the monopolist's profit-maximizing price, because it reflects the highest price consumers will pay for the quantity where MR = MC.
5. Note that the price is not set where marginal revenue equals average revenue, nor where demand equals marginal cost, nor where average total cost equals marginal cost. The key is the intersection of MR and MC, then using the demand curve to find the corresponding price.