IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly
A monopolist faces the demand curve P = 100 - 2Q, where P is price in rupees and Q is units. Its marginal cost is constant at Rs 20. What price will it charge to maximise profit?
The monopolist charges Rs 60. Marginal revenue is 100 - 4Q, and equating it to marginal cost of Rs 20 gives Q = 20. Substituting this output into the demand curve gives price 100 - 40 = Rs 60.
- ARs 20
- BRs 40
- CRs 50
- DRs 60Correct
- Rs 80
Explanation
Total revenue = 100Q - 2Q^2, so MR = 100 - 4Q. Setting MR = MC gives 100 - 4Q = 20, so Q = 20. Price = 100 - 2(20) = Rs 60. Rs 20 is the marginal cost, and Rs 40 is the mistake of using the MC=P rule of perfect competition, which gives Q = 40 and price Rs 20.
Did you get it right without looking?
One question tells you little. A timed set on Profit maximisation under perfect competition and monopoly shows your real accuracy, how long you take and where you lose marks.
More Profit maximisation under perfect competition and monopoly questions
- Which condition holds for a perfectly competitive firm in long-run equilibrium?
- A monopolist with linear demand has large economies of scale, so its long-run average cost is well below that of small competitive firms. Wh…
- A firm's fixed costs rise because of a higher annual licence fee, with no change in marginal cost or demand. In the short run, what happens …
- At the output where MR = MC, a monopolist's marginal cost is rising and its price is above average total cost. Which statement is correct?
- A perfectly competitive Indian tea packer faces a market price of Rs 40 per pack. Its total cost is TC = 500 + 2Q^2, where Q is packs per da…
- A perfectly competitive industry is taken over by a single firm with no change in costs, which are constant returns with identical marginal …