At which point does a monopoly set its output to maximize profit?

• A. Where average total cost equals marginal cost (ATC = MC)
• B. Where marginal cost equals marginal revenue (MC = MR)
• C. Where demand equals supply
• D. Where price equals marginal cost (P = MC)

Answer: (B)

Verified step by step guidance

1. Understand that a monopoly maximizes profit by producing the quantity where its marginal revenue (MR) equals its marginal cost (MC). This is because profit maximization occurs when the cost of producing one more unit equals the revenue gained from selling that unit.
2. Recall the definitions: Marginal Cost (MC) is the additional cost of producing one more unit, and Marginal Revenue (MR) is the additional revenue from selling one more unit.
3. Recognize that unlike in perfect competition, a monopolist's marginal revenue is not equal to the price (P) because the monopolist faces a downward-sloping demand curve, so MR < P.
4. Set up the condition for profit maximization as \(\text{MC} = \text{MR}\), and identify the output level (quantity) where this equality holds.
5. Note that other conditions such as \(\text{ATC} = \text{MC}\) or \(\text{P} = \text{MC}\) do not determine the monopoly's profit-maximizing output, but may be relevant in other market structures or for other analyses.