CFA Practice Question
A monopoly firm selling textbooks to students in a small town is currently maximizing profits by charging a price of $50 per book. It follows that the marginal cost of textbooks is ______.
B. less than $50
C. greater than $50
A. equal to $50
B. less than $50
C. greater than $50
Correct Answer: B
Since marginal revenue is always less than price for a monopolist, and since a monopolist maximizes profits by setting output so that marginal revenue equals marginal cost, it must be true that marginal cost is less than price.
User Contributed Comments 8
| User | Comment |
|---|---|
| euniceyew | WHY THE ANSWER IS NOT A. PROFIT MAXIMIZING IS NOT MC=MR?OR THIS IS ONLY A BREAKEVEN POINT? |
| wulin | Profit maximizing output is at where MC=MR. However Price is higher than both MC and MR at that output level. Take a look at the graph again. |
| mrushdi | profit maximizing OUTPUT is where MC=MR, so at this output level P=D is the profit maximizing price, which is > MC. |
| georgek | remember, P<>MR in a monopoly |
| YOUCANDOIT | MR curve lies below the demand curve and monopoly profit-maximizing output is MC=MR, but below price (which is on the demand curve) |
| dmfz | Look at Exhibit 18 of reading 16, and you will see a graph that explians it better. |
| fzhou | MR=MC < P |
| pigletin | it's a good question |