Question

6. The Power Tires Company has man in the figure. The firm's marginal cost company has market power and faces the demand curve shown im's marginal cost and marginal revenue curve are MC = 30+32 MR = 300 -69 Price ($/tire) $300 - 100 Quantity of tires (thousands) Answer the following questions: a. What are the firm's profit-maximizing output and price? b. If the firm's demand declines to P= 240-20, what is the firm's profit- maximizing level of output and price? How does this compare to your answer to question a? (hint: MR=240-40) c. Draw a diagram showing these two outcomes. Holding marginal cost equal, how does the shape of the demand curve affect the firm's ability to charge a higher price?

Answer 1

Answer.

A. The firms profit maximizing output is at level where MR=MC.

270 =9Q

So, Q = 30.

And, price = 300-3Q

So, p= 210.

B. For MR=MC.

210=7Q.

So, Q= 30

And, price = 180.

Given the different demand function, for the same level of profit maximizima output, the prices are different.

C.Given the same marginal cost, if the demand is less responsive to the price, same level of quantity can be sold at higher prices as compared to more responsive demand to prices.

for MC² 30+30. - MR = 300-60 and MR = 240-40 uR 300€ MRY a MR 5 10 15 20 25 30 35 40 Quantity