Question

21. A music studio faces the following demand schedule when releasing the next Compact Disc by Bruno Mars. The studio must pay Mr. Mars $12 million to make the CD, and the marginal cost of printing the CD is always $3 per disc. P is price, in dollars; Q is quantity demanded, listed in millions of CDs. Calculate total revenue, marginal revenue, fixed cost, marginal cost, variable cost, total cost, and profit for each quantity listed (if a column is in millions, please label it accordingly).

Price    Q         TR       MR      FC       MC      VC      TC       Profit

14        0m                   -                     -                                 

13        1m

12        2m

11        3m

10        4m

9          5m

8          6m

7          7m

6          8m

5          9m

4          10m

What price and quantity would a profit-maximizing music studio choose? What profit will the studio make?

Show this problem graphically by graphing the Demand curve, MR, and MC, labeling everything relevant, including the equilibrium price and quantity. Show Consumer and Producer Surplus. Extra credit (1 point each): Also show the deadweight loss of monopoly (hint: extend the linear demand curve down to the x-axis). How much would the firm produce if it was owned by the government and trying to maximize economic efficiency (make total surplus as big as possible)?

(Problem continued on next page)
Finally, assume this demand curve is representative of demand for any Bruno Mars CD. What is the most money he could ask for in order to make his next CD that would still allow the firm to produce the CD? (Please answer the following hints: how do fixed costs affect the firm’s decisions on price and quantity? What is the minimum amount of economic profit a firm needs to still make the product? Therefore, how much money could Bruno Mars make while still allowing the studio to stay in business?)

Answer 1

The following table shows total revenue,marginal revenue,fixed cost,marginal cost,variable cost,total cost and profit of printing CDs at different price and quantity

Price	Quantity (million)	TR (Price*Quantity) Million	Marginal Revenue (Million)	Fixed Cost (Million)	Marginal Cost (Million)	Veriable Cost (Million)	Total Cost (Million) FC+VC	Profit/Loss (TR-TC) Million
14	0	0	-	12	-	0	12	-12
13	1	13	13	12	3	3	15	-2
12	2	24	11	12	3	6	18	6
11	3	33	9	12	3	9	21	12
10	4	40	7	12	3	12	24	16
9	5	45	5	12	3	15	27	18
8	6	48	3	12	3	18	30	18
7	7	49	1	12	3	21	33	16
6	8	48	-1	12	3	24	36	12
5	9	45	-3	12	3	27	39	6
4	10	40	-5	12	3	30	42	-2

• At price $9 and $8 ,profit is maximisied and the firm will make $18million profit

Following graph shows the demand cure and marginal revenue of CDs

Perice I wtor 2 4 6 8 10 12 quantity OPPO F7