A decrease in variable costs will cause the monopoly to do what?Group of answer choicesDecrease the priceRaise the priceLower the level of output
Question
A decrease in variable costs will cause the monopoly to do what?Group of answer choicesDecrease the priceRaise the priceLower the level of output
Solution
A decrease in variable costs will cause the monopoly to "Raise the price". This is because variable costs are costs that change with the level of output. If variable costs decrease, it means the firm can produce each unit at a lower cost. This increases the firm's profit margin on each unit sold, which could lead to an increase in supply. In a monopoly, an increase in supply can lead to a decrease in price. However, since a monopoly has market power, it may choose to not pass on the cost savings to consumers and instead keep prices the same to increase profits. The exact outcome will depend on the specific demand and cost conditions faced by the monopoly.
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