Question

If the long-run marginal cost curve is below the marginal revenue curve at the point of output for a monopolist that is making profit, then the firm has:

1) too large a plant size

2) too small a plant size

3) insufficient knowledge about the plant size until it knows it marginal cost

4) insufficient knowledge about the plant size until it knows it’s demand curve

Answer 1

The correct answer is (2) too large a plant size

The profit maximizing conditions for the monopoly is that the marginal revenue must be equal to the marginal cost. ($\text{MR=MC}$ )

When the marginal cost curve is below the marginal revenue curve then the marginal revenue will be greater than the marginal cost. $\text{MR>MC}$. When a monopoly is too large, it will generate more profits and revenue, therefore, the marginal revenue will be more than the marginal cost.