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.The profits are maximized in the expected sense when:

Question

Quizplus · Accepted Answer

To maximize profits in the expected sense, the firm must calculate the expected marginal revenue (EMR) from each demand curve and set its output such that MC = EMR for the combined probabilities. 
EMR1 = (20-Q)/2 and EMR2 = (40-Q)/2 
Therefore, EMR = (EMR1+EMR2)/2 
= [(20-Q)/2 + (40-Q)/2]/2
= (30-Q)/2
= 15 - (Q/2)
Thus, MC = 15 - (Q/2) to maximize profits. Option D states that MC = EMR, which is the correct choice.

A Risk Neutral Monopoly Must Set Output Before It Knows