Question

lwebua)pi-4519-tent nd-18580620 1/courses/2181 19553 COMB/HW 4.pdf 3. A monopolistic firm is currently producing 3,500 units of output; price is $100, marginal revenue is 57, average total cost is $5.s0, marginal cost is $4.50, and average variable cost is $3.75. The firm should a. raise price because the firm is losing money. b. keep the price the same because the firm is producing at minimum average variable cost. c. raise price because the last unit of output decreased profit by $5.50. d. lower price because the next unit of output increases profit by $2.50

Answer 1

Answer is d. Lower prices because the next unit of output increase profit by $2.50.

Explanation:

As the marginal revenue is more than marginal cost, the firm is not in equilibrium. It shall raise its output by reducing the prices till the point where the marginal revenue equals to marginal cost, as the next unit of output yields s profit of $2.50 (i.e. 7.00 -4.50)