6 A monopolist produces at a point where the price elasticit

6. A monopolist produces at a point where the price elasticity of demand is -0.7 and the marginal cost is $2. If you were hired to advise this monopolist on how to increase his profits, you would find that the way to increase his profits is to a. b. c. d. lower the price decrease his output produce the output quantity at which price equals marginal cost increase his output

Solution

Output must be reduced (Option B). Note that when a monopolist reduces its output, it will be doing so by increasing its price. Now a higher price when demand is inelastic, will increase revenue and profit. Therefore, monopolist should produce in the elastic range which is possible when it reduces output and increases price.