Question 46

Profit maximization for a monopoly occurs when marginal revenue equals marginal cost.

A monopoly maximizes its profit at the point where marginal revenue (MR) is equal to marginal cost (MC). This condition ensures that the additional revenue from selling one more unit is exactly equal to the cost of producing that unit, leading to the highest possible profit.

A) When price equals marginal cost

This condition is typically associated with perfectly competitive markets, not monopolies. In a monopoly, the price is set above marginal cost due to the market power held by the monopolist, which contradicts the profit maximization principle for monopolistic competition.

B) When marginal revenue equals marginal cost

This is the correct answer because it accurately reflects the profit maximization condition for a monopoly. By producing at the level where MR equals MC, the monopolist ensures that it is maximizing the difference between total revenue and total cost.

C) When total revenues are maximized

Maximizing total revenues does not necessarily lead to profit maximization. A monopolist may achieve high revenues by lowering prices, but this could increase costs and reduce profits. Therefore, total revenue maximization is not the same as profit maximization.

D) When marginal cost is minimized

Minimizing marginal cost does not guarantee profit maximization for a monopoly. In fact, a monopolist might operate at a higher marginal cost compared to competitive firms, and simply minimizing costs without considering revenue will not lead to maximized profits.

Conclusion

The profit maximization condition for a monopoly is specifically defined as the point where marginal revenue equals marginal cost. This ensures that the monopolist is operating at the most efficient output level for maximizing profit, while the other options do not accurately reflect the unique characteristics of monopolistic behavior.