4. The profit-maximizing price will a. equal $12.50 b. cannot be equal to $10 c.

Question

4. The profit-maximizing price will

a.   equal $12.50

b.   cannot be equal to $10

c.   equal $25 which is the highest price the monopolist can charge

d.   both b and c

e.   all of the above

5.   Which of the following statements is (are) FALSE?

a.   Demand is inelastic at a price of $11 and total revenue will increase if price is reduced from $11 to $10.50.

b.   Total revenue reaches its maximum value when price is set at $12.50.

c.   Marginal revenue is negative when price is $5 and thus total revenue is falling when the firm cuts price to sell more units of output.

d.   both a and b are false statements

e.   all of the above statements are false

Explanation / Answer

The required answers are given assuming that the marginal cost is constant and zero.

4. The correct answer is a. The profit maximizing price is the corresponding to the output level at which the marginal revenue and the marginal cost are equal. MR and MC are equal at the ouput level of 25,000 units, corresponding to which the price is $12.50.

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