CFA Level I · CFA Level I Exam · The Firm and Market Structures
A monopolist faces the linear inverse demand P = 100 − 2Q and has a constant marginal cost of 20. The profit-maximizing price is closest to:
The profit-maximizing price is about 60. Marginal revenue is 100 − 4Q, which equals the marginal cost of 20 at Q = 20. Substituting this quantity into the demand curve gives a price of 100 − 2(20) = 60.
- A40
- B60Correct
- C80
Explanation
MR = 100 − 4Q. Setting MR = MC gives 100 − 4Q = 20, so Q = 20. Price = 100 − 2(20) = 60. The price of 40 is the competitive outcome (P = MC gives Q = 40, P = 20) mistaken... more simply, 40 results from using Q = 30 and misapplying MR; 80 is the price at Q = 10.
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