CFA Level I · CFA Level I Exam · The Firm and Market Structures
A monopolistically competitive firm faces demand P = 100 − 2Q and has constant marginal cost of 20. Marginal revenue is MR = 100 − 4Q. The profit-maximizing price is closest to:
The profit-maximizing price is about 60. Setting marginal revenue equal to marginal cost gives 100 − 4Q = 20, so Q is 20. Substituting into the demand curve gives P = 100 − 2(20) = 60.
- A40
- B60Correct
- C80
Explanation
Set MR = MC: 100 − 4Q = 20, so Q = 20. Price from demand is 100 − 2(20) = 60. A price of 40 comes from using P = MC with Q = 30 incorrectly, or mistakes in the demand slope; 80 results from using Q = 10.
Did you get it right without looking?
One question tells you little. A timed set on The Firm and Market Structures shows your real accuracy, how long you take and where you lose marks.
More The Firm and Market Structures questions
- Which feature best distinguishes monopolistic competition from oligopoly?
- In a perfectly competitive market, a firm's demand curve is most likely:
- A monopolist sells in two separable markets and can charge different prices. At the profit-maximizing allocation, marginal cost is 30. Marke…
- Compared with a monopolistically competitive market, an oligopoly is most likely characterized by:
- Firms in a perfectly competitive industry are earning positive economic profit in the short run. In the long run, assuming free entry and ex…
- Two firms in a duopoly each choose to keep a high price or cut price. If both keep high prices, each earns 10. If both cut, each earns 4. If…