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CA Foundation · Business Economics · Price Determination in Different Markets

A monopolist maximises profit and faces a downward-sloping linear demand curve. Which statement about its equilibrium is correct?

At a monopolist's profit-maximising output, price is greater than marginal revenue. Selling more requires cutting the price on all units, so MR lies below the demand curve (AR). Equilibrium is at MR = MC, which leaves price above marginal cost.

  1. APrice equals marginal cost at the equilibrium output
  2. BPrice is greater than marginal revenue at the equilibrium outputCorrect
  3. CMarginal revenue is greater than price at the equilibrium output
  4. DAverage revenue is equal to marginal revenue at the equilibrium output

Explanation

For a monopolist facing a downward-sloping demand curve, extra units can be sold only by lowering the price on all units, so MR lies below AR (price). Profit is maximised where MR = MC, so price exceeds MR and also exceeds MC. The option saying P = MC describes perfect competition.

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