ACCA Performance Management (F5) Certification Practice Exam

In the context of a monopolist, profit maximization occurs when which of the following is true?

1. Marginal cost is greater than marginal revenue

2. Marginal cost equals marginal revenue

3. Marginal revenue is zero

4. Marginal cost is less than average cost

The correct answer is: Marginal cost equals marginal revenue

In the context of a monopolist, profit maximization occurs when marginal cost equals marginal revenue. This is a fundamental principle in economic theory. For a monopolist, the profit-maximizing output level is found where the additional cost of producing one more unit (marginal cost) is exactly equal to the additional revenue gained from selling that unit (marginal revenue). At this point, any increase in production would result in the cost of producing an additional unit exceeding the revenue earned from its sale, which would decrease overall profit. Conversely, producing less would mean missing out on potential profit since the revenue from selling an additional unit would be greater than its cost. By equating marginal cost with marginal revenue, the monopolist can determine the optimal level of production that maximizes profit, while also ensuring that they are not producing beyond the efficient point where profits start to decline. Understanding this equilibrium is crucial for analyzing monopolistic markets and their pricing strategies.