CFA Level I · CFA Level I Exam · The Firm and Market Structures
A profit-maximizing monopolist faces a downward-sloping demand curve. At its profit-maximizing output, the monopolist's price is most likely:
The monopolist sets marginal revenue equal to marginal cost, but with a downward-sloping demand curve marginal revenue is below price. Price therefore ends up above both marginal revenue and marginal cost, which is why monopolies earn a markup over marginal cost.
- Aequal to marginal revenue and equal to marginal cost
- Babove marginal revenue and equal to marginal cost
- Cabove marginal revenue and above marginal costCorrect
Explanation
A monopolist produces where marginal revenue equals marginal cost. Because demand slopes downward, marginal revenue lies below price, so price exceeds marginal revenue and therefore exceeds marginal cost. The first option applies to perfect competition; the second wrongly sets price above marginal revenue while equal to marginal cost.
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