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Question
Microeconomics
Posted about 2 months ago

Suppose that a perfectly competitive firm and a monopoly firm have the same market demand and cost curves, and neither firm wants to shut down given their current demand.

If the perfectly competitive firm produced the quantity where demand is unit elastic, which of the following is also true?

Choose 1 answer:

A The monopolist produces the quantity that is perfectly elastic.
(B) The monopolist produces the quantity whose marginal revenue equals zero.
(C) The monopolist produces a quantity on the inelastic portion of the demand curve.
(D) The monopolist also produces the unit elastic quantity.
(E) The monopolist produces a quantity on the elastic portion of the demand curve.
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Answer from Sia
Posted about 2 months ago
Solution
a
Perfectly Competitive Firm: In a perfectly competitive market, firms produce where price equals marginal cost (P = MC). If the perfectly competitive firm produces at the unit elastic point of the demand curve, it means that the price elasticity of demand (PED) is equal to 1 at that quantity
b
Monopolist's Marginal Revenue: For a monopolist, the marginal revenue (MR) is less than the price (P) due to the downward-sloping demand curve. The monopolist maximizes profit where MR equals marginal cost (MC)
c
Unit Elastic Point: At the unit elastic point, the total revenue is maximized, and the marginal revenue (MR) is zero. This is because the percentage change in quantity demanded is equal to the percentage change in price
d
Monopolist's Production: Given that the monopolist maximizes profit where MR = MC, and MR is zero at the unit elastic point, the monopolist will produce the quantity where MR = 0
Answer
(B) The monopolist produces the quantity whose marginal revenue equals zero.
Key Concept
Marginal Revenue and Elasticity
Explanation
A monopolist maximizes profit where marginal revenue equals marginal cost. At the unit elastic point, marginal revenue is zero, so the monopolist will produce at this quantity.

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