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Profit maximizing behaviour

21 December, 2015 - 16:10

We established in the previous chapter that, in deciding upon a profit-maximizing output, any firm should produce up to the point where the additional cost equals the additional revenue from a unit of output. What distinguishes the supply decision for a monopolist from the supply decision of the perfect competitor is that the monopolist faces a downward sloping demand. A monopolist is the sole supplier and therefore must meet the full market demand. This means that if more output is produced, the price must fall. What are the pricing and output implications of this? Let us use an example to illustrate.