If a firm with marginal cost equal to $2 faces a demand curve defined as QD = 10 - 2P, then revenue is at a maximum when price is $6.

Question

Quizplus · Accepted Answer

Revenue is maximized when marginal revenue equals marginal cost. Given the demand curve QD = 10 - 2P, the inverse demand curve is P = 5 - 0.5Q. Marginal revenue, derived from the inverse demand curve, would be MR = 5 - Q. Setting MR equal to the marginal cost of $2 to maximize revenue, we get 5 - Q = 2, which solves to Q = 3. Substituting Q back into the inverse demand curve to find the price, P = 5 - 0.5(3) = 3.5, not $6.

If a Firm with Marginal Cost Equal to $2 Faces