If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $4 and they are charging the profit- maximizing retail price of $12, what is wholesale price of the product?
A)$8
B)$16
C)$12
D)$4

Question

Quizplus · Accepted Answer

The profit-maximizing output for the monopoly firm is where marginal revenue (MR) equals marginal cost (MC). 
Let the wholesale price be 'w'. Then, the distributor's profit maximizing output is where:

MR = P = $12 (since they are charging the profit-maximizing retail price)

MC = $4 (given in the problem statement)

So, MR = MC: 
$12 - w = $4 
Solving for 'w', we get: 
w = $8

Therefore, the wholesale price of the product is $8.

If a Monopoly Firm Sells to Competitive Distributors and the Distributors