When a monopolist reduces the amount of output that it sells, the price of its output: A. may increase or decrease, depending on the elasticity of demand B. stays the same C. decreases D. increases
Question
When a monopolist reduces the amount of output that it sells, the price of its output: A. may increase or decrease, depending on the elasticity of demand B. stays the same C. decreases D. increases
Solution
The answer is A. When a monopolist reduces the amount of output that it sells, the price of its output may increase or decrease, depending on the elasticity of demand.
Here's why:
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If the demand for the product is inelastic (i.e., consumers are not very responsive to changes in price), then the monopolist can reduce output and raise the price without losing too many sales. This is because consumers will continue to buy the product despite the price increase.
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On the other hand, if the demand for the product is elastic (i.e., consumers are very responsive to changes in price), then a reduction in output and a corresponding increase in price could lead to a significant drop in sales. In this case, the monopolist may choose to reduce the price in order to sell more of the product.
So, the effect on price when a monopolist reduces output depends on the elasticity of demand for the product.
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