Blog article 3, CFA Level 1 Economics
This blog post deals with an important topic from Reading 15, “The Firm and Market Structures“, namely the calculation of the optimal quantity and the optimal price in a monopoly.
1. The monopolist must first know the inverse demand function (P = a – b*Q). So if only the demand function (Q = c – d*P) is given, it must be solved for the price P.
2. Afterwards one receives the revenue function by multiplication of the inverse demand function and the quantity Q.
3. The marginal revenue is then calculated by deriving the revenue function.
4. You equate marginal revenue and marginal cost,
5. solve for the quantity and obtain the monopolist´s optimal quantity Q*.
6. If this is inserted into the inverse demand function, the optimal price P* demanded by the monopolist is obtained.
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