MICROECONOMICS

ASSIGNMENT

COMPILED BY:

Name : Fehmeen Anwar

Class : BBA 2K11-A
Instructor : Imran Said
Q. Explain why each of the following statement is
false? For each, write the correct statement.

a. A monopolist maximizes profits when MC=P.

Correct statement:
The maximum profit price and quantity of a monopolist
come where the firm’s marginal revenue equals its marginal
costs:
MR=MC.

Sol. (a) –
The above statement is true for a Perfect competitive firm where
marginal cost must be equal to price, ‘MC=P’, for maximizing
profit but in the case of a monopolist i.e. an imperfect competitor,
this does not apply.
A monopolist maximizes his profits at a point where marginal
revenue equals marginal costs, ‘MR = MC’, the intersection
point of these two curves indicates the best point, where the profit
maximizes for a firm.
Hence, p roducing at an output level where ‘MR>MC’ or
‘MR<MC’ will yield lower profits.
 b. The higher the price elasticity, the higher is the
monopolist’s price above its MC.

Correct Statement:
The higher the price inelasticity, the higher is the
monopolist’s price above its MC.

Sol. (b) – The statement contradicts the idea of an elastic

commodity, in which the consumers tend to switch to other
substitutes in case of a price increase, a higher monopolist’s price
above MC would be beneficial 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 an
inelastic commodity, increasing the price would maximize his
profits.

c. Monopolist ignores the marginal principle.

Correct Statement:
A monopolist uses the marginal principle theory in making
important economic decisions regarding the marginal future
advantages and disadvantages. They do not ignore the
‘marginal principle’.
Sol. (c) – Marginal principle is the fundamental notion that people
maximizes their income and profit when the marginal cost and
marginal profit of their actions are equal. The above statement
clearly shows that a monopolist who aims at maximizing his
marginal revenues and marginal profits can not ignore this
important principle, where as he uses it by equating marginal
revenue and marginal costs for profit maximization.

Monoplolists use the marginal principle to determine the output

level that they should produce in order to achieve maximum
profits. This principle states:

A firm should take into consideration only the costs and

benefits and look ahead to the future leaving behind the sunk
costs.