IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly
A monopolist's demand curve is linear and downward sloping. Compared with the demand curve, its marginal revenue curve is best described as:
For a linear demand curve P = a - bQ, marginal revenue is a - 2bQ. It begins at the same vertical intercept but falls twice as steeply, so it lies below the demand curve at every positive output.
- AThe same curve as demand
- BParallel to demand and above it
- CStarting at the same price intercept but twice as steepCorrect
- DHorizontal at the level of the price
- Starting at the same price intercept but half as steep
Explanation
For linear demand P = a - bQ, revenue is aQ - bQ^2, so MR = a - 2bQ. It has the same intercept as demand but double the slope, so it lies below demand. Horizontal MR applies only to price takers.
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