A firm with market power has the inverse demand curve P = 90 - 1.5Q and marginal cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its profit-maximizing output level will:
A) increase from 14 to 28 units.
B) decrease from 24 to 12 units.
C) increase from 20 to 32 units.
D) decrease from 28 to 14 units.

Question

Quizplus · Accepted Answer

Under perfect price discrimination, the firm will produce where price equals marginal cost. Setting P = MC, we get 90 - 1.5Q = 10 + Q. Solving for Q gives Q = 32.

A Firm with Market Power Has the Inverse Demand Curve