Question

Download Records decides to release an album by the group Mary and produces the album with no fixed costs, but the total cost of downloading a paying Mary her royalty is $6 per album. Download Records can act as a m marketing division finds that the demand schedule for the album is as soon! below. Use this information to answer questions 43-44 Quantity of Albums Demanded Price of Album group Mary and the Little Lamb. It st of downloading an album to a CD and ords can act as a monopolist. Its ule for the album is as shown in the table 2000 4000 6000 8000 43) What is Download Record's profit maximizing price and quantity? What are Download Record's profits? ords is regulated to produce the efficient output, what is the quantity it What is the price? What are its economic profits? 44) If Download Records is re will produce? What is the price

Answer 1

43. A monopolist produces at a point where the Marginal Revenue equal to marginal cost. We are given Marginal cost =6 per album.

We can calculate the MR using the table, as follows -

Graphing the Revenue and cost curves-

Price Quantity Demanded Total Revenue =P*Q Marginal Revenue = change in TRI Change in Quantity 22 2000 18 36,000 36,000/2000=18 4000 14 56,000 60,000 20,000/2000=10 4,000/2000=2 6000 10 8000 48,000 -12,000/2000=(-600 0)

We get, From the figure above, we can see that, the profit maximizing quantity (where MR=MC) happens at quantity, Q=5000 and the price charged would be 12 (where the line from quantity 5000 touches demand curve).

MC AR/ Demand curre. 2000 8000 10000 4000], Good 5,000 MR

Thus, P*=12 and Q* =5000

Profit = TR-TC

TR=P*Q and TC= MC(because it is constant, thus MC=Ac) *Q

Thus, profit = 12*5000-6*5000= 60,000-30,000= 30,000.

44. The efficient output level is where Price equal to Marginal cost, P=MC. It happens where P=MC= 6.

The quantity produced will be 8,000 at this level.

Thus, price, P*=6 and Quantity, Q*= 8,000

Profit = TR-TC= 6*8000-6*8000 = 0

Thus, firm earns zero economic profits at the efficient output level.