To maximize profit, a monopolist should set MR=MC .

To maximize revenue, a monopolist should set MR=0 .

Question

To maximize profit, a monopolist should set MR=MC .

To maximize revenue, a monopolist should set MR=0 .

BlackTom AI · Accepted Answer

The question presents two statements and asks you to evaluate them in the context of monopoly behavior.

Option 1: 'MR=MC' as the condition to maximize profit.
- In profit-maximization analysis for a monopolist, the optimal output is found where marginal revenue equals marginal cost (MR = MC). This is because the firm would increase output as long as the additional revenue from selling one more unit (MR) exceeds the additional cost of producing that unit (MC), and it would decrease output once MC exceeds MR. At the point MR = MC, the last unit adds as much to revenue as to cost, so net profit is maximized. This is a standard result derived from comparing total profit across outputs and finding the peak.
- It is important to note that the monopolist’s price is typically above marginal cost due to the downward-sloping demand curve, which creates a positive markup. However, the condition for profit maximization remains MR = MC, not MR > MC or MR < MC.
- A common misconception is to think MR = Price or to equate MR with average cost; those statements would not correctly capture the optimization condition. The key is comparing the marginal revenue to marginal cost, not the price itself.

Option 2: 'MR=0' as the condition to maximize revenue.
- Revenue maximization occurs where marginal revenue equals zero (MR = 0). This is because total revenue (TR) is the integral of MR with respect to quantity, so the slope of TR with respect to quantity is MR. When MR is positive, TR increases with output; when MR is negative, TR would fall if output is increased. The maximum TR occurs precisely where MR crosses zero.
- This condition can lead to outputs where profits are not maximized; in many cases, MR = 0 occurs at a higher output than where MR = MC, and the resulting price may be well above average total cost, below ATC, or anywhere in relation to costs depending on the cost structure. Therefore, maximizing revenue does not guarantee maximum profit.
- A frequent confusion is to treat MR as a fixed property of the firm’s demand; in reality MR depends on the quantity sold through the demand curve, and MR changes sign from positive to negative as quantity increases.

Putting the two together:
- The first statement identifies the standard profit-maximizing condition for a monopoly (MR = MC). This is about balancing additional revenue and additional cost per unit to maximize profit.
- The second statement identifies the condition for revenue maximization (MR = 0). This is about maximizing total revenue, not profit, and it typically yields a different output level.
- Together, the analysis shows why the two objectives—profit maximization and revenue maximization—can imply different production decisions for a monopolist, due to how MR responds to output along the downward-sloping demand curve.

ECON_104B_001_25S Lecture Quiz #5

To maximize profit, a monopolist should set MR=MC . To maximize revenue, a monopolist should set MR=0 .

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