CA Foundation · Business Economics · Price Determination in Different Markets
A firm in monopolistic competition has the demand curve P = 60 - 2Q and a constant marginal cost of ₹12 per unit. What output maximises its profit?
Profit is maximised at 12 units. Marginal revenue from P = 60 - 2Q is 60 - 4Q, and equating it to marginal cost of ₹12 gives Q = 12. Equating price to marginal cost would wrongly give 24 units.
- A6 units
- B12 unitsCorrect
- C24 units
- D15 units
Explanation
Total revenue = 60Q - 2Q², so MR = 60 - 4Q. Setting MR = MC gives 60 - 4Q = 12, so Q = 12. Setting P = MC gives 60 - 2Q = 12, so Q = 24, which is wrong because it ignores that MR lies below price. Q = 6 comes from using MR = 60 - 2Q... incorrectly halving the output.
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