Questions: Monopoly

Question 1

A monopolist faces demand P = 100 - Q and constant marginal cost MC = 20. What quantity maximizes profit?

• A. Q = 80
• B. Q = 40
• C. Q = 20
• D. Q = 60

Answer: (B)

For a linear demand P = 100 - Q, marginal revenue is MR = 100 - 2Q (same intercept, twice the slope). Setting MR = MC: 100 - 2Q = 20, so Q = 40. The price is P = 100 - 40 = 60. A common error is setting P = MC (the competitive rule), which gives Q = 80 — but that ignores that MR < P for a monopolist.

Question 2

A profit-maximizing monopolist typically charges the highest price that any consumer is willing to pay.

• T. True
• F. False

Answer: False

The monopolist charges the profit-maximizing price, not the maximum willingness-to-pay price. Charging too high reduces quantity sold so much that total revenue and profit fall. The optimal price trades off margin against volume, found by the MR = MC condition. Only a perfectly price-discriminating monopolist extracts maximum willingness to pay from every buyer.

Question 3

Why is marginal revenue less than price for a monopolist, and what does this imply about monopoly output relative to the competitive outcome?

Model answer: A monopolist faces a downward-sloping demand curve, so selling one more unit requires lowering price on all units already sold. MR = P - (price cut × existing quantity), which is always less than P. Since MR < P, setting MR = MC occurs at a lower quantity than the competitive P = MC condition. The monopolist produces less and charges more than would occur under competition, generating deadweight loss.

In perfect competition, each firm is a price taker — it can sell more without cutting its price, so MR = P. A monopolist cannot do this. The lost revenue on existing units (the price-reduction effect) makes each additional unit less profitable than its price suggests. This wedge between MR and P is the fundamental source of monopoly inefficiency.