Profit-maximizing price is determined by

• A. The price equals marginal revenue
• B. The price equals the maximum willingness to pay
• C. The price equals average total cost
• D. The price equals marginal cost

Answer: (B)

Profit-maximizing pricing is driven by buyers’ valuations, which are captured by how much people are willing to pay for each unit. The price you charge cannot exceed the maximum amount any buyer is willing to pay for a unit, because setting a price above that would mean no sales. In practice, you pick the quantity where marginal revenue equals marginal cost and read the corresponding price off the demand curve. That price will never exceed the market’s maximum willingness to pay, because that maximum sets the upper bound on what buyers will accept. So thinking of profit-maximizing price as determined by the maximum willingness to pay highlights the idea that buyers’ valuations cap the possible price. The other conditions (pricing at marginal revenue, at average total cost, or at marginal cost) describe different market situations and do not generally dictate the profit-maximizing price in a typical monopoly setup.