Question

You are the manager of a monopoly that faces an inverse demand curve P = 100 - 10Q and has constant average and marginal costs of $20 per unit. The government is considering legislation that would regulate your firm's price at $20 per unit. (a) What is the profit-maximizing quantity at the regulated price? Please show your calculations. (b) What is the profit (or loss) at the regulated price or quantity? Please show your calculations. (c) Can this firm continue to operate at this profit (or loss) level in the long run? Please explain.

Answer 1

P = 100 - 10Q

(a) When P = $20,

20 = 100 - 10Q

10Q = 80

Q = 8 units

(b) Since Price = ATC = $20, Profit is zero, since Profit = Q x (P - ATC).

(c) In the long run, cost structure remaining unchanged, the firm can decide to continue production or shut down, since it is operating at break-even if marginal-pricing policy is continued.