A Level Economics AQA Practice Exam

At what level do monopolies typically operate in terms of production?

1. At the minimum average cost

2. At the point where price equals marginal cost

3. Where marginal revenue equals marginal cost

4. At full market saturation

The correct answer is: Where marginal revenue equals marginal cost

Monopolies typically operate at the level of production where marginal revenue equals marginal cost. This principle is derived from profit-maximization behavior in economics. A monopoly, as a single seller in the market, controls the price and quantity of the good it produces. In order to maximize profits, the monopolist will produce output up to the point where the additional revenue gained from selling one more unit (marginal revenue) is equal to the additional cost of producing that unit (marginal cost). If the marginal revenue exceeds marginal cost, the monopolist can increase profit by increasing production; conversely, if marginal cost exceeds marginal revenue, reducing production would increase profit. Thus, the equilibrium point where these two curves intersect indicates the output level that maximizes the monopolist's profit. This behavior illustrates why monopolies do not typically produce at levels that would minimize average costs or ensure price equals marginal cost, as those conditions are more associated with perfect competition rather than monopolistic markets. Monopolies also do not generally aim for full market saturation; instead, they may restrict output to elevate prices, leading to a deadweight loss in the market.