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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

A monopolist faces the demand curve P = 100 - 2Q and has constant marginal cost of Rs 20. What price does it charge at the profit-maximising output?

The monopolist charges Rs 60. Marginal revenue is 100 - 4Q, equated with marginal cost of 20 to give output of 20, and the demand curve then gives a price of 100 - 2(20) = Rs 60.

  1. ARs 20
  2. BRs 40
  3. CRs 60Correct
  4. DRs 50
  5. Rs 80

Explanation

Revenue R = 100Q - 2Q^2, so MR = 100 - 4Q. Setting MR = MC gives 100 - 4Q = 20, so Q = 20. Price from demand = 100 - 40 = 60. Rs 20 is the competitive-style MC pricing mistake, and Rs 40 is MR at Q = 15 misread.

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