Given the accompanying graph depicting a hypothetical monopoly, which of the following statements best describes how the monopolist determines its profit-maximizing output level?

• A. The monopolist produces where demand equals marginal cost.
• B. The monopolist produces where average total cost equals marginal revenue.
• C. The monopolist produces where marginal cost equals marginal revenue.
• D. The monopolist produces where price equals marginal cost.

Answer: (C)

Verified step by step guidance

1. Recall the fundamental rule for profit maximization in a monopoly: the 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. Understand that the demand curve shows the price consumers are willing to pay for each quantity, while the marginal revenue curve lies below the demand curve for a monopolist due to the downward-sloping demand and the need to lower price to sell additional units.
3. Recognize that the monopolist does not produce where demand equals marginal cost, because that would be the condition for allocative efficiency in perfect competition, not monopoly profit maximization.
4. Note that average total cost (ATC) equaling marginal revenue (MR) is not the profit-maximizing condition; ATC relates to cost per unit, while MR and MC determine the optimal quantity to maximize profit.
5. Finally, understand that the monopolist sets the price based on the demand curve at the profit-maximizing quantity where MR = MC, which usually results in a price higher than marginal cost.