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Answers to common managerial economics questions

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Indicate whether each of the following statements is TRUE or FALSE and explain your answer.

a. If a monopolist is producing a level of output at which demand is inelastic, the firm is not maximizing profits, and increasing output will decrease total revenue
b. When a monopolist maximizes profits, the price is greater than the marginal cost of producing the output. This means that consumers are willing to pay more for additional units of the product than these additional units costs to produce. Thus, the monopolist should produce and sell additional units of output
c. A monopolistcally competitive firm produces a level of output at which price equals $80, marginal revenue equals $40, average total cost equals $100, marginal cost equals $40, and average fixed cost equals $10. To maximize profit, the firm should produce a smaller output and sell it at a higher price.
d. In a monopolistically competitive market, a firm has market power because it produces a differentiated product. This means that the firm earns positive economic profit in the long run.

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Solution Summary

Answers and detailed explanations to four questions about managerial economics. Topics include:
- Price elasticity of demand
- Profit maximization for monopolists
- Profit maximization for monopolistic competitors
- Economic profit for monopolistic competitors

Solution Preview

a. False
The monopolist maximizes its profits by producing at the level of output where Marginal Revenue (MR) equals Marginal Cost (MC). This could occur at any point on its demand curve, even a point where demand is inelastic.
Also, because MR is ...

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