1 If the monopolist is operating in the inelastic range of d

1 If the monopolist is operating in the inelastic range of demand,

(a) it could raise total revenue by lowering price.

(b) it would be maximizing total revenue rather than profit.

(c) marginal revenue would be negative.

(d) it could increase profit by lowering its price and increasing output.

(e) it could increase profit by increasing both price and output.

2. At the monopolist’s profit-maximizing output, price

(a) always exceeds average cost.

(b) is less than marginal cost.

(c) exceeds marginal cost.

(d) equals marginal cost.

(e) may be greater than or equal to average cost but will never be less than average cost.

3. When a monopoly firm is operating in a range of output where total revenue is increasing as output increases, then marginal revenue

(a) is also increasing.

(b) is constant.

(c) is positive, but falling.

(d) is negative and falling.

Solution

(1) (b)

When demand is inelastic, an increase in price will increase the total revenue, but effect on cost is uncertain. So, given the limited information we can infer that monopolist is targeting revenue maximization than profit maximization.

Option (e) is incorrect because, even though revenue will increase, output will fall.

(2) (c)

Monopolist maximizes profit by equating MR = MC, and his price (demand curve) lies above MR curve. So P > MC

(3) Uncertain.

Marginal revenue = Change in TR / Change in output. So, when TR & output are increasing, it is possible that TR increases faster than output (in which case MR is increasing), OR output increases faster than TR (in which case, MR is positive but falling).