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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

A profit-maximising monopolist faces a downward-sloping demand curve. At which output level will it choose to produce, assuming it is operating?

A profit-maximising monopolist produces where marginal revenue equals marginal cost. Because its demand curve slopes downward, marginal revenue is below price, so the price charged at that output is higher than marginal cost, unlike in perfect competition where price equals marginal cost.

  1. AWhere price equals marginal cost
  2. BWhere marginal revenue equals marginal costCorrect
  3. CWhere average revenue equals average cost
  4. DWhere total revenue is maximised
  5. Where average cost is at its minimum

Explanation

Profit is maximised where marginal revenue equals marginal cost, with MC cutting MR from below. For a monopolist MR lies below price, so price exceeds MC at this output. Setting P = MC is the perfectly competitive rule, not the monopoly rule.

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