CFA Level I · CFA Level I Exam · The Firm and Market Structures
A monopolist sells in two separable markets and can charge different prices. At the profit-maximizing allocation, marginal cost is 30. Market X has price elasticity of demand of −2.0 and Market Y has price elasticity of −4.0 (absolute values, assumed constant at the relevant prices). Using MR = P(1 − 1/|E|), the price charged in Market X is closest to:
The Market X price is 60. With elasticity of 2, marginal revenue equals 0.5 times price. Setting this equal to marginal cost of 30 gives a price of 60. The more elastic Market Y would be charged only 40.
- A40
- B60Correct
- C80
Explanation
Set MR = MC in Market X: P(1 − 1/2) = 30, so P = 60. In Market Y: P(1 − 1/4) = 30, so P = 40. The less elastic market bears the higher price. The 40 option is the Market Y price; 80 results from using 1/|E| incorrectly.
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