Question

Sally owns the only cake shop in town (she is a monopolist). at a quantity of five cakes, the marginal cost of producing one more cake is $12, while the marginal revenue from selling one more cake is $10. in order for sally to maximize profits, should she increase or decrease output? should she increase or decrease prices?

Answer 1

Answer:

Sally should increase the prices, while decreasing the output.

Explanation:

A monopolist  will produce that quantity where the marginal revenue curve (MR) equals marginal cost curve (MC). However, monopolists have the ability to change the market price based on the amount they produce since they are sole producers in the market, so they have an upper hand when deciding prices to charge. In order to get maximum profits Sally should increase the prices, while decreasing the output. In this way once the supply would decrease and demand will be more, the consumers will be willing to pay even more for Sally's cake and she would be able to earn more revenue.