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IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

A monopolist with a downward-sloping demand curve and rising marginal cost wishes to maximise profit. Which output rule should it follow?

A profit-maximising monopolist produces where marginal revenue equals marginal cost. It then charges the price on the demand curve for that quantity. Price equals marginal cost is the competitive rule and does not maximise monopoly profit, because marginal revenue is below price.

  1. AProduce where price equals marginal cost
  2. BProduce where marginal revenue equals marginal costCorrect
  3. CProduce where average revenue equals average cost
  4. DProduce where total revenue is at its maximum
  5. Produce where average cost is at its minimum

Explanation

Profit is maximised where marginal revenue equals marginal cost, with MC cutting MR from below. Price is then read off the demand curve at that output. Setting P = MC is the perfectly competitive rule and would give a monopolist less than maximum profit because MR lies below price.

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