Suppose that a monopoly
1) faces the following (normal) demand function: Q = 80 - 2P
2) faces no fixed costs (FC)
3) has constant MC = $10 unit
Answer the following question (note you will need to create your own graph to answer these questions):
What are the profits earned by this monopolist? Note, do not include a dollar sign ($) in your answer.
Find the inverse demand function
P = 80/2-Q/2
P = 40 - 0.5Q
Marginal revenue function same as demand function but with twice the slope
MR = 40 - Q
Marginal cost is $10
At the profit-maximizing level of output marginal revenue and marginal cost should be equal
40 - Q = 10
Q = 30 units
P = 40-0.5*30 = $25
Therefore the price will be $25 and the quantity will be 30 units. There is no fixed cost which means that marginal cost is same as average cost.
Profit = (P-AC)*Q = (25-10)*30
= $450
The profit earned by this monopolist is 450.
Suppose that a monopoly 1) faces the following (normal) demand function: Q = 80 - 2P...
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