CFA Level I · CFA Level I Exam · The Firm and Market Structures
A monopolist faces the inverse demand curve P = 100 − 2Q and has constant marginal cost of 20 per unit and no fixed costs. The profit-maximizing price is closest to:
The price is 60. Marginal revenue is 100 − 4Q; setting it equal to marginal cost of 20 gives output of 20 units. Substituting into the demand curve gives a price of 100 − 2(20) = 60, which exceeds marginal cost.
- A40
- B60Correct
- C80
Explanation
MR = 100 − 4Q. Setting MR = MC: 100 − 4Q = 20, so Q = 20. Price = 100 − 2(20) = 60. Check: at P = 40 (Q = 30) profit is 600, versus 800 at P = 60. The price of 40 results from setting P = MC (Q = 40 gives P = 20, not 40), and 80 is wrongly obtained from the intercept-based midpoint.
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