On a standard monopoly graph with the demand curve (D), marginal revenue curve (MR), and marginal cost curve (MC), at which point does a monopoly set its price?

• A. At the point where marginal revenue equals marginal cost
• B. At the point on the demand curve directly above where marginal revenue equals marginal cost
• C. At the point where the marginal revenue curve intersects the demand curve
• D. At the point where the demand curve intersects the marginal cost curve

Answer: (B)

Verified step by step guidance

1. Understand that a monopoly maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). This is the fundamental profit-maximizing condition: \(\text{MR} = \text{MC}\).
2. Identify the quantity on the horizontal axis where the MR curve intersects the MC curve. This quantity represents the profit-maximizing output level for the monopoly.
3. Once the profit-maximizing quantity is found, move vertically upward from this quantity to the demand curve (D). The demand curve shows the highest price consumers are willing to pay for that quantity.
4. The price set by the monopoly is found at the point on the demand curve directly above the quantity where \(\text{MR} = \text{MC}\). This price is higher than the marginal cost, reflecting the monopoly's market power.
5. Summarize that the monopoly's price is not set where MR equals MC, but rather on the demand curve at the quantity where MR equals MC, ensuring maximum profit.