Solution to In-Text Exercise 17.

2:
In In-Text Exercise 17.1, we determined that KCCs inverse demand function is P(Q) = 100
0.01Q and its marginal revenue function is MR = 100 0.02Q. To determine the profitmaximizing output for KCC, we first satisfy the quantity rule by setting MR = MC:
100 0.02Q = 40
Solving, we find that Q = 3,000 cubic yards of concrete per year. Using the inverse demand
function, we find that the correct price to charge to sell 3,000 cubic yards is $70 [ = 100
0.01(3,000)]. The best option for KCC is either to produce 3,000 cubic yards (and charge $70) or
to produce nothing. If KCC produces nothing, it earns no profit, so as long as KCC earns positive
profit from producing 3,000 cubic yards it will be better to produce than not to. KCCs profit
from producing 3,000 cubic yards is its total revenue (P Q) less its total cost (marginal cost for
each of the 3,000 cubic yards plus fixed cost), which is:
= ($70 3,000) [($40 3,000) + $40,000] = $50,000
Since producing 3,000 cubic yards of concrete per year provides $50,000 in profit (which is
greater than $0), KCCs profit maximizing sales quantity is 3,000 cubic yards of concrete per
year, which it will sell at a price of $70.