Question 30

The profit maximization condition for a monopoly occurs when marginal revenue equals marginal cost.

A monopoly maximizes its profit by producing the quantity of output at which marginal revenue (MR) is equal to marginal cost (MC). This condition ensures that the last unit produced adds as much to revenue as it does to cost, optimizing profit.

A) When price equals marginal cost

This statement is incorrect for monopolies, as it describes the condition for allocative efficiency in perfectly competitive markets. In monopolies, the price is typically set above marginal cost to maximize profits, leading to a deadweight loss.

B) When marginal cost is minimized

Minimizing marginal cost is not a condition for profit maximization. While firms aim to reduce costs, profit maximization specifically requires the relationship between marginal revenue and marginal cost to be considered, rather than simply minimizing costs.

C) When marginal revenue equals marginal cost

This is the correct condition for profit maximization in a monopoly. By setting output where marginal revenue equals marginal cost, a monopoly maximizes its profits, as it ensures that any additional unit produced does not decrease overall profit.

D) When total revenues are maximized

Maximizing total revenues does not necessarily lead to profit maximization. A firm can have high revenues while incurring high costs, resulting in lower profits. Profit maximization specifically requires balancing marginal revenue and marginal cost.

Conclusion

The correct answer is that a monopoly maximizes profit when marginal revenue equals marginal cost, as this condition ensures optimal production levels. In contrast, the other options fail to capture the essence of profit maximization in monopolistic contexts, either describing conditions for different market structures or focusing on revenue rather than profit.