If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $3 and they are charging the profit- maximizing retail price of $9, what is wholesale price of the product?
A)$9
B)$6
C)$12
D)$3

Question

Quizplus · Accepted Answer

In this scenario, the monopoly firm does not face any competition in the market, hence they have the power to set the wholesale price as they please. The profit-maximizing strategy for the monopoly firm would be to set the wholesale price such that it maximizes their profits. We know that the marginal cost for the distributors is $3, therefore if the wholesale price is set at $6, the distributors will make a profit of $3 per unit sold. This will also ensure that the distributors will continue to purchase from the monopoly firm. Thus, the wholesale price of the product is $6.

If a Monopoly Firm Sells to Competitive Distributors and the Distributors