9.6 : Profit Maximization in Monopoly

The monopolist's goal is to maximize profits, which is achieved by producing at a level where marginal revenue (MR) equals marginal cost (MC). Marginal revenue is the additional revenue gained from selling one more product unit, while marginal cost is the additional cost of producing one more unit.

As production increases, the marginal cost (MC) typically per unit also increases, depicted by an upward-sloping MC curve. This reflects diminishing productivity, which increases the expense of producing additional units due to variable costs like labor and raw materials. Conversely, the marginal revenue (MR) curve is downward-sloping and steeper, indicating that the monopolist must reduce the price to sell more units.

Profit maximization occurs when the firm produces output where MC equals MR, with the MC curve intersecting the MR curve from below. Producing below this equilibrium means the firm misses potential profits since the revenue from selling additional units would exceed their production cost. However, extending production beyond this point also results in lower profits, as the cost of making one more unit (MC) would surpass the revenue it generates (MR). By producing at the level where MC = MR, the monopolist ensures maximum profitability by balancing additional costs against additional revenues. This approach allows the monopolist to find the precise quantity that maximizes profit, given the unique market conditions they face as the sole producer in the market.