If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $5 and they are paying the profit- maximizing wholesale price of $10, what is the retail price of the product?
A)$15
B)$5
C)$10
D)$7

Question

Quizplus · Accepted Answer

Since the distributors are selling the product at a constant marginal cost of $5, the difference between the wholesale price ($10) and the marginal cost ($5) is $5. Therefore, the monopoly firm has a markup of $5. In order to maximize profits, the monopoly firm will set the retail price at a level where the demand equals the marginal cost, which is $10 + $5 = $15. Hence, the correct answer is A.

If a Monopoly Firm Sells to Competitive Distributors and the Distributors