A monopolist is able to maximize his profits, when:

Question

Accepted Answer

The correct option is 3: Marginal cost is equal to marginal revenue.
In both perfect competition and monopoly, the fundamental condition for any firm to maximize its profits is to produce at the output level where Marginal Revenue (MR) equals Marginal Cost (MC). Marginal Revenue is the extra revenue earned from selling one more unit, and Marginal Cost is the extra cost incurred from producing one more unit. As long as MR is greater than MC, the firm should increase output because each additional unit adds more to revenue than it adds to cost, thereby increasing total profit. When MR equals MC, the firm has exhausted all opportunities to increase profit, and this point marks the profit-maximizing output level (Q\*).

The incorrect option is 1: Average cost is minimum.
Producing at minimum average cost (AC) corresponds to technical efficiency. While a firm aims for efficiency, profit maximization (MR=MC) often occurs at an output level where AC is not at its minimum, especially for a monopolist, whose production decision is guided by demand and marginal revenue, not just cost minimization.

The incorrect option is 2: Output is maximum.
A monopolist maximizes profit, not output. To maximize output, a firm would generally have to lower the price substantially along its downward-sloping demand curve. Since profit is Total Revenue minus Total Cost, producing the maximum possible output could result in excessive costs or very low marginal revenues, leading to significantly lower overall profits or even a loss.

The incorrect option is 4: Price is higher than cost.
While a monopolist's price must be higher than its cost (specifically Average Total Cost) to earn a profit, this condition alone does not guarantee maximum profit. A firm could have a positive profit margin but still increase its total profit by adjusting output until the MR=MC rule is met. Maximum profit is achieved at the precise output where the marginal condition is satisfied.