Profit maximization for a monopolist occurs where which condition holds?

• A. P = ATC
• B. P > MR
• C. P < MC
• D. MR = MC

Answer: (D)

Profit is maximized when the extra revenue from producing one more unit equals the extra cost of producing that unit. For a monopolist, this means setting output where marginal revenue (the revenue from the next unit sold) equals marginal cost (the cost of producing that unit). Because a monopolist’s demand is downward-sloping, the marginal revenue is less than the price, so the price shown on the demand curve at that quantity will typically be higher than the marginal cost. Once MR = MC determines the quantity, the corresponding price is found from the demand curve. If MR > MC, producing another unit would add more to revenue than it costs, so you should increase output; if MR < MC, producing another unit would destroy profit, so you should reduce output. Therefore, MR = MC identifies the profit-maximizing level of production.