Question

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion.

Cost Data		Demand Data
Total Output	Total Cost	Quantity Demanded	Price
0	$25	0	$60
1	40	1	55
2	45	2	50
3	55	3	45
4	70	4	40
5	90	5	35
6	115	6	30

What will the maximum total profits be?

Multiple Choice

• $90

• $65

• $85

• $110

Answer 1

Answer

MC(n)=TC(n)-TC(n-1)
MC(n)=marginal cost of n th unit
TC(n)=Total cost of n units of output
MC(1)=40-25=15 and so on

TR=P*Q

TR(0)=0*60=0 and so on

Marginal revenue of n th unit of output =total revenue of n unit of output – total revenue of n-1 units of output

MR(n)=TR(n)-TR(n-1)
MR(1)=55-0=55 and so on

Profit=TR-TC

Profit (0)=0-25=-25 and so on

Cost Data		Demand Data
Total Output	Total Cost	Quantity Demanded	Price	TR	MR	MC	Profit
0	25	0	60	0			-25
1	40	1	55	55	55	15	15
2	45	2	50	100	45	5	55
3	55	3	45	135	35	10	80
4	70	4	40	160	25	15	90
5	90	5	35	175	15	20	85
6	115	6	30	180	5	25	65

the firm maximizes profit at MR=MC or the nearest lower MC

where

Q=4 units, MR=25 and MC=15

Profit=160-70=$90

Option 1