ECONOMICS ASSIGNMENT

Presented to: Sir Imran Said

Presented by: Ujala liaqat

Batch: BBA 2K11-A

 1. A monopolist maximizes profits when MC=P.

This statement is false as the monopolist always maximizes profits where

MR=MC. This is the point of profit maximization for a monopoly firm.

The first thing to remember is that marginal revenue is the change in total revenue
that occurs as a firm changes its output.

TR=P x Q

MR = Change in Total Revenue/ change in output

When a monopolist increases output, it lowers the price on all previous units. As a
result, a monopolist’s marginal revenue is always below its price.

In order to maximize profit, a monopolist produces the output level at which

marginal cost equals marginal revenue.

Producing at an output level where MR > MC or where MR < MC will yield

lowers profits.

The marginal revenue curve is a graphical measure of the change in revenue that
occurs in response to a change in price.

It tells us the additional revenue the firm will get by expanding output.
The above graph and table illustrate that the monopolist maximizes profits where
MR=MC.

Correct statement: A monopolist maximizes profit when MC=MR. For monopolist

P>MR.
 2. The higher the price elasticity of demand, the higher is a monopolist’s
price above MC.

This statement above is not true as by doing this the profits of the monopolist will
decrease. For a monopolist’s prices it would be beneficial if it is above MC and if
the commodity has an inelastic demand i.e. it is a necessity with no close
substitutes.
Thus a monopolist whose major purpose is maximizing the profits reduces the
prices to earn more profits. Or in the case of inelastic commodity increasing the
price would maximize the profits.

Correct statement: The higher the price elasticity of demand, lower is a

monopolist’s price above MC. So to maximize profits, prices of commodity with
no substitutes should be increased.

3. A monopolist ignores marginal function.

A monopolist doesn’t ignore marginal function as it maximizes the profit where

marginal revenue is equal to marginal costs.

Marginal principle states that a firm should take into consideration only the costs
and benefits and look ahead to the future leaving behind all the sunk costs.

Correct statement: a monopolist does not ignore the “marginal principle” as it is

used in making important economic decisions.