A Level Economics AQA Practice Exam

What is the goal of firms experiencing monopoly power?

1. To maximize market competition

2. To minimize prices for consumers

3. To achieve profit maximization at MR=MC

4. To promote product variety

The correct answer is: To achieve profit maximization at MR=MC

The goal of firms experiencing monopoly power is to achieve profit maximization at the point where marginal revenue equals marginal cost (MR=MC). In a monopolistic market, a single firm dominates and has significant control over the price and supply of its product. Unlike firms in competitive markets, a monopolist faces a downward-sloping demand curve, meaning it can influence the market price by adjusting the quantity it supplies. To maximize profits, a monopolist will produce a quantity of output where the additional revenue generated from selling one more unit (marginal revenue) equals the additional cost of producing that unit (marginal cost). This is because, at this point, any further increase in output would result in marginal costs exceeding marginal revenue, leading to decreased profits. Maximizing profit through the MR=MC condition allows the monopolist to set higher prices than would prevail in competitive markets, leading to potentially higher economic profits. This understanding of profit maximization is fundamental to evaluating the behavior of monopolistic firms in the economy.