A risk neutral monopoly must set output before it knows for sure the market price.There is a 50% chance the firm's demand curve will be P = 20 - Q and a 50% chance it will be P = 40 - Q.The marginal cost of the firm is MC = Q.What is the expression for the expected marginal revenue function?

Question

Quizplus · Accepted Answer

The expected marginal revenue function is calculated by taking the average of the marginal revenue functions from each demand curve scenario. The marginal revenue for P = 20 - Q is MR = 20 - 2Q, and for P = 40 - Q is MR = 40 - 2Q. The expected MR is the average: E(MR) = (20 - 2Q + 40 - 2Q) / 2 = 30 - 2Q.

A Risk Neutral Monopoly Must Set Output Before It Knows