Given a graph showing the demand, marginal revenue, and marginal cost curves for a profit-maximizing monopolist, at which point does the monopolist set its output level?

• A. Where demand equals marginal cost
• B. Where marginal revenue equals marginal cost
• C. Where marginal cost equals average total cost
• D. Where demand equals marginal revenue

Answer: (B)

Verified step by step guidance

1. Understand that a profit-maximizing monopolist chooses the output level where marginal revenue (MR) equals marginal cost (MC). This is because producing beyond this point would add more to cost than to revenue, reducing profit.
2. Identify the marginal revenue curve and the marginal cost curve on the graph provided.
3. Locate the point where the marginal revenue curve intersects the marginal cost curve. This intersection determines the monopolist's optimal output quantity.
4. Recognize that the demand curve is not used directly to set output but to determine the price the monopolist will charge at the chosen output level.
5. After finding the output where MR = MC, move vertically up to the demand curve to find the corresponding price the monopolist will set.