This question is form the cfa book. A monopoly’s equilibrium level of output is least likely to occur where: A. demand is elastic B. demand is inelastic C. marginal revenue equals marginal Answer is B, can someone please explain why?
If a monopoly is operating in the inelastic region of their marginal revenue curve, they can earn more total revenue by cutting down on production. Operating in the inelastic region of the demand curve means the amount of revenue gained from producing that one more unit is less than the amount they lose in lowering the price.
PBR is correct, basically, if the demand elasticity is below 1, then you need to reduce the output quantity to maximize revenue. core-models.com has a good microeconomics model that let you see how all the variables change between a perfectly competitive and a monopoly firm.
if demand is inelastic, 1% reduction in price will cause more then 1% increase in quantity demand, which increases revenue. so to maximize profit, producer will produce until demand becomes elastic (~1)
If demand is inelastic, a move in the price line would leave the quantity demanded almost unchanged. By contrast if the demand is elastic, moving the price would move the demand in the opposite direction until the equilibrium quantity is reached.
to maximize profits, operate at the level of output where MR=MC, so C is out… in addition, for monopoly only, a monopolist would want to price their product where demand is elastic ( elasticity>1: the change in quantity is greater than the change in price) therefore when the monopolist cut the price by a certain percentage the quantity will increase by a larger percentage n therefore revenues increase. so that eliminates A as the question is asking for the least likely option.