A single-price monopolist is currently producing in the inelastic portion of its market demand curve. In order to maximize profits, the monopolist should change the price and output in which of the following ways?

A. P=Increase; Q=Increase

B. P=Increase; Q=Decrease

C. P=Decrease; Q=Decrease

D. P=No Change; Q=Increase

P=Increase; Q=Decrease

Explanation:

In a monoploistic market a single supplier controls the supply of a good or service and also determines the price.

Price inelasticity occurs when the quantity demanded for a good is not greatly changed by increase in the price.

Ideally an increase in price should reduce quantity demanded, but in inelastic situation the quantity demanded does not reduce. This could be as a result of no substitutes for the good.

In an inelastic region monopolistic producer should reduce production to reduce cost. This is done to reduce marginal cost in inelastic region.

Price is increased so that fewer goods are sold at higher price, and cost of production is also reduced.

Answer: B. P=Increase; Q=Decrease

Explanation: For the single-price monopolist who is operating in the inelastic portion of its market demand curve, this means that demand will not be affected if price is increased, meaning the quantity demanded will not decrease or will decrease only very slightly with an increase in price.

Therefore to maximize profits, the monopolist should increase Price and decrease output. This is because in decreasing the number of output produced, less production costs will be incurred, and in increasing the price of the available outputs, more revenue will be generated to even offset the reduced number of output.