Suppose when a monopolist produces 75 units its average reve

Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal revenue is $5 per unit, its marginal cost is $6 per unit, and its average total cost is $5 per unit. What can we conclude about this monopolist?

The monopolist is not currently maximizing profits; it should produce more units and charge a lower price to maximize profits

The monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price to maximize profits

The monopolist is currently maximizing profits and its total profits are $375

The monopolist is currently maximizing profits and its total profits are $300

Solution

Monopolist Marginal revenue (MR) = 5 and margina cost (MC) = 6

Monopolist profit maximization condition is MR=MC.

In this case MR<MC which means that at output level 75 units, the additional output produced wil lead to an additonal reveue of $5 which is not able to cover the marginal cost = $6. Hence, monopolist is incurring a loss at 75 units of output level and should decrease the production untill MR=MC is reached. Because demand has inverse relationship with price, fewer outputs produced will be sold at a higher price. So option (b) is correct.