CFA CFA Level 1 CFA Level 1 Question of the Week – Economics

CFA Level 1 Question of the Week – Economics

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    • Matt_AnalystPrep
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      Within an industry, each firm selects an
      output level such that marginal revenue equals marginal cost. This decision
      process is optimal for:

      • A. all firms, independent of industry structure.
      • B. all industrial structures except for monopolies.
      • C. all industrial structures except for monopolies and oligopolies.
    • kalalah
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      I thought MR = MC is optimal for perfect competition, or am I getting this wrong?

    • excelmonkey
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      MR = MC means you’re producing just the right amount for maximum profit.

      http://www.investopedia.com/ask/answers/041315/how-marginal-revenue-related-marginal-cost-production.asp

    • MaryamKhan
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      So is C the right answer?

    • fabian
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      I think it’s A. We’ll see at the end of the week.

    • Matt_AnalystPrep
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      The answer is A.

      For perfectly competitive price-taking firms, marginal revenue and price will be equal since they face an essentially horizontal (perfectly elastic) demand curve. For monopolies, the output is chosen such that marginal revenue and marginal cost are equal, but the demand curve is downward sloping, so the price will be set above the marginal revenue.

      While trying to find another way to explain it, I stumbled upon a university website (https://www3.nd.edu/~cwilber/econ504/504book/outln4b.html) that sums it well:

      1. In choosing the output to produce, the monopolist follows the marginal principle.
      a. This principle states the profit maximizing output is that output where marginal revenue equals marginal cost.
      1. If marginal revenue is greater than marginal cost, the monopolist should increase output.
      2. If marginal revenue is less than marginal cost, the monopolist should decrease output.
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