Question

(Table: Prices and Demand) Use Table: Prices and Demand. The New Orleans Saints have a monopoly on Saints logo hats. The marginal cost of producing a hat is $18. The Saints should produce _____ hats and charge _____ to maximize its profits.

Table: Prices and Demand Quantity of Hats Price Demanded per Hat $30 1 28 26 3 24 4 22 5 20 18 6 7 16 8 14

4; $22

3; $24

1; $28

2; $26

Answer 1

Note that total revenue from the sale of second unit is $52 and total revenue from the sale of third unit is $72. From the sale of 4th unit total revenue is $88. From this we can find that the marginal revenue from the sale of third unit is (72-52) = $20 and marginal revenue from the sale of 4th unit is $16.

Since marginal cost is fixed at $18, marginal revenue should be greater than or equal to marginal cost. Given this, the profit-maximizing quantity will be three units because at this quantity marginal revenue and marginal cost are closest. The corresponding market price is $24.00

Select 3; $24