AN! CHAPTERS Review Questions ERS TO RELEVANT STUDY QUESTION! 1. Whats the relationship tween the solution to the firm's long-run cost-minimizaton problem and the long-run total cost curve? The long-run total cost curve plots the minimized total cost for each level of output holding input prices fixed. In other words fora given set of input prices, the long-run total cost curve represents the toll cost associated with the solution to the long-run eost minimization problem foreach level of output. 5. ) Ifthe average cost curve increasing, must the marginal est curve le above the average cost curve? Why or why not? ‘bf the marginal cost curves increasing, must the marginal cst curve ie above the average cost, curve? Why or why not? 8) When MC> AC, average cost is increasing, and when MC < AC , average cost is decreasing, So, ifthe average cost curve is inereasing it must le below the marginal cost curve. b) Ifthe marginal cost curve is increasing, it may lie above or below the average cost curve The only determining factorhere is whether oF not marginal cost lies above or below average cost. fit lies above, average cost will be increasing and ifit les below, average cost will be decreasing, Knowing that marginal cost is increasing or decreasing tells us nothing about average cost 10, Suppose tha the minimum level of short-run average cost was the same for every possible plant size, What would that tl you about the shapes of the long-run average and long-run marginal cost ‘The long-run average cost exve isthe envelope tothe short-run average cost curves associated with each level of output. Ifeach of these short-run average cost curves has the same minimum point, the long-run average cost curve will ba horizontal ine tangent to all of these minimum points. Because the long-run average cost curve will be flat, long-run average cost i nether Increasing nor decreasing, aad the long-run marginal cost curve will also be flat and equal to long-run average cast.Problems 826. A short-run foal cost carve is given by the equation STC(Q) = 1000 + S09. Derive expressions for, and then skech, the corresponding short-run average cost, average variable cost and average fixed cost curves sre(Q)=1000+ 509" STC(Q) _ 1000 sac(qy = SEED) 1000, 59 Qa g t02 A¥C(Q)=500 1000 4rc(g) =! OS Graphing SACO), AVC(O,and AFC(Q) yields 1200.00 sac 1000.00 300.00 600.00 400.00 + 2200.00, 0.09 | 00 5.00 1000 1500 20.00 Q Cost ‘827. A producer of hard disk drives has a short-run total cost curve given by S7C(Q)= K+ O°. Within the same set of axes, sketch a graph ofthe short-run average cost curves for three diferent plant sizes: K'= 10, C= 20, and K= 30. Based on this graph, what i the shape of the long-run average cast curve?é SAC SACs SAC 60 Since each of these short-run average cost curves reaches a minimum at an average cost of 2.0, the long-run average cost curve associated with these short-run curves will bea horizontal lin, tangent to the bottom of eac’ ofthese curves ata long-run average cost of 2.0. (CHAPTER 2 Review Questions 4. A110 percent inerease in the price of automobiles reduces the quantity of, automobiles demanded by'8 percent. What is the price elasticity of demand for automobiles? 5 Alinear demand eurve has the equation Q= 50~ 1007. What is the choke price? ‘The choke price isthe price where Q=0. Using the given demand curve we have6 Explain why we might expeet the price elasticity of demand for speedboats tobe more negative than the price elastiity of demand for Hight bulbs. ‘Speedbouts could probably be categorized as a luxury item whereas light bulbs are more likely categorized as a necessity. For the necessity, the change in quantity demanded will be relatively small for any percent change in price. The change in quantity demanded may be quite large, however, for luxury tem. Since the percent change in quantity demanded is ikely higher for the Iuxury item for any given percent change in price, the elasticity of demand would be less (more negative). 7. Many busines travslors receive reimbursement from their companies when they travel by sir, whereas vacation travelers typically pay for their trips ou of thelr own pockets. How would i affect the comparison between the price elasticity of demand fora travel for business travelers versus vacation travelers? Because business travelers receive reimbursement for expenses, they will probably be less sensitive to price changes than the vacation traveler who pay’ out of her own pocket. ‘This implies the price clastcity for vacationers would be less (more negative/smaller number) than for business travelers 8, Explain why the price elasticity of demand for an entre product category (suchas yogurt) is likely to be Less negative than the price elasticity of demand for a typical brand (such as Dannon) ‘within that produet category the prices fora particular produc, such as Dannon, within a product category changes (Say it increases) then it is easy fora consumer to switch to another bran, implying a relatively high percent change in quantity dsmanded forthe product. On the other hand, if prices forthe entire product category change, substitutes are not as easly found and the percent change in quantity demanded for the category wil be relatively lower. This implies the elastic product category willbe higher (less negative) than the elasticity fora single product. forthe entire9. What does the sign of the erost-prce elasticity of demand between two gous tell us about the nature ofthe relationship between those goods? ‘When the exoss-price elasticity is positive we have %8Q1 4 var, Either a) both Q, and P, increased or b) they both decreased. Since they are moving in the same direction, the product must be substitutes. Take coffee and tea for example; ifthe price of tea increases, the quantity of coffee demanded will increase ‘When the cross-proe elas is negative, Q, and P, are moving in the opposite direction, implying the product ar crplements. Take coffe and cream for example; ifthe pice of ream inereass the quantity of cffee demanded will serease. Problems 21, The demand for beerin Japan i given by the fllowing equation: Q!=700~ 2P~ Py 0.1K where Pis the price of beer, Ps the price of nuts, and Fis average consumer income, 8) What happens tothe demand for beer when the price of nuts goes up? Are beer and nuts ‘demand substitutes or demand complements? 1) What happens tothe demand for beer when average consumes 9) Graph the demand curve for beer when P= 100 and [= 10,000, 8) When the price of nuts goes up, the beer quantity demanded falls forall levels of price (mand shifts left). Beer and nus are demand complements, b) When income rises, quantity demanded increases forall Ievels of price (demand shifts rightward), ©) Now: Q*=700—-2P~ 100+ 0.1*10,000. 600 -2P = P= 800-05 Q800 1600) 2.2, Suppose the demand curve ina particular markets given by 4) Pot this curve in a graph, by Atwhat price will demand be unitary clastic? 8) The inverse demand funetion is P 'b) We know that the value ofthe price elasticity of demand is given by =a—bp,then 92-5 and ep =422 forainear demand fanstin: Q=a—bP thon FE = —b and sgn = 2 5 = 1/2. For demand to be unitary elastic it must be that which implies that P= 5,24, Suppose that demand for bagels inthe local storeis given by equation Q*~ 300-1007. In {his equation, P denotes the price of one bagel in dollars. a) Fill in the following table: P 010/048 [080 [OSS [280 e 20r | ') At what price Is demand inlast a Too | as |S] aS | Far | W038 [OTe | 02 |-0aRs |S ‘We can find elasticites of demand using the following formula ‘This demand curve is linear. The inverse demand function is P =3- 1/100 Q* s 30 OF 1.50 the elasticity of demand i equal toForall prices below $1.50, the demand is inelastic, while fora prices above $1.50, the demand is elastic. 225, ‘The demand curve for ice ercam ina small town has een stable forthe past few years. In ‘most months, when the equilibrium price is $3 per serving for the most popular ice cream, ‘customers buy 300 servings fer month. For one month the price of materials used to make lee cream increased, shilling the supply curve tothe lft. The equilibrium price i that month Increased fo $4, and customers bought only 200 portions inthe month. With these data draw a graph ofa linear demand curve for ie eream inthe tow. Find pric clasiity of demand for prices ‘equal to $8 and $4. Atwhat price would the demand be unitary clastic? Using the data from the problen we ean graph the demand curve. The slope ofthe demand curve is equal aP/AQ = 1/100 So the eqution ofthe demandcurve is P= A ~001Q. We can find the vertical intercept A substituting P= 3 and Q™= 300, 3=A-0.01(0), so A = 6. ve vertical intercept (choke price) isP The equation ofthe demand curve is then P= 6 0.010.lasticty of demand ean be computed using formula When the elasticity is-1, Q» 300 and P= $3, Thus demand is unitary elastcat a price P» $3. Based on the data fom the problem the graph ofthe demand curve is 200-300 en‘The slope ofthe demand curve is equatto A =— 3-4-1 sl 30 ~ 300-200 100 Find the verticaintrcop inthe graph orby substituting into P(Q)=m 0.019 one ofthe two points The inverse demand Function is P(Q) =6-0.010. 6-019 _ 600-9 2.6. Granay’s Restaurantsells apple pes. Granny knows that the demand curve for her pies ‘docs not shit overtime, but she wants to learn more about that demand. She has tested the market {or her pies by charging different prices. When she charges 4 per pic she sels 30 pies per week. ‘When she charges $5, she sel 24 pies per week. Ifshe charges $450, she sells 27 apple pes per week. » this data dra a graph ofthe linear demand curve for Granny's apple pies 1) Find the price clastclty of demand at cach of the three prices. “The demand for apple pes is G'= 54 —6P.n 24 27 30 GEER: ‘To find the equation ofthe demand curve, cbserve that when she drops the price by $050, she slls3 ‘more pies. So, movement along the demand occurs so that AQ IAP =-3/05--6 ‘The demand cuve then has the form (= 4 ~6P, where Aisa constant, We ean determine the value of 4 ‘using any one ofthe thee datapoints onthe demand curve. For example, if we use the point P= 5 and Q 4, we Soe that 24 =~ 6(5}, 50 that A= S4. So the domand curve can be described bythe equation 54 -or. To find elasticity of demand atany point onthe demand curve, we we formula AQP _P apa 0 213 Consider a linear demand curve, Q= 380~7P. 1) Derive the inverse demand curve corresponding to this demand curve. by What isthe choke price? ©) What is the price elasticity of demand at P= $0?a b) The choke price occurs atthe point where equation above yields P=5). b) At P=50, the choke price, the elasticity will approach negative infinity Setting Q'= 0 in the inverse demand 2.14 Suppose thatthe quantity of steel demanded in France is given by Q,= 100 -2P, + OSY +0.2Ps, where Q, isthe quantity of steel demanded per year, P, is the market price of steel, ¥ is real GDP in France, and P, is the market price of aluminum. In 2011, Ps= 10, Y ‘= 40, and PA = 100, How much steel will be demanded in 2011? What isthe price elasticity of demand, given market conditions in 2011? ‘We are given that Y= 40, and P; = 100, and so substituting these values into the equation that determines the quantity demanded gives us 100~ 275 + 0.5(40) + 0.2(100) 05~ 140-2, ‘This is the equation forthe cemand curve for steel in France. When te price of stel is 10, the ‘quantity ofstel demanded i thus 120, From equation (2.4) inthe txt, he price cla sven by ty of demand for steel when the price is 10 is, 0.167.‘Suppose that in 2011, the global market for hard drives for notebook computers consists of a large numberof producers, itis relatively easy for new producers to enter the industy, and when the market for notebook hard drives is booming, new producers do, in fact, enter. 24S A firm currently charges a price of $100 per unit of output, and is revenue (price ‘maltiplied by quantity s S7,000, At that price i faces an elastic demand (6, P-<—1). the firm were to raise ts price by S2 Fer unt, which ofthe following levels of output could the firm possibly expect to see? Explain. 2400 1) 600 800 1000 Recall that for an elastic good, a higher price charged by the firm leads toa decrease in total revenue. Therefore, the firm should expecta level of output such that its revenue ata price of $102 is less than $70,000. Only if te output level is 400 or 600 is this possible (102*400 = $40,800) and (102600 = $61,200). At the other quantities the revenue would rise, 2.16 Gina usualy pays a price between $5 and $7 per gallon of fe eream. Over that range of prices, her monthly total expenditure on icecream increases as the price decreases. What does this Imply about her price elasicty of demand for icecream’? Gina's expenditure on ice-cream is P*Q, where P isthe price and Q is the number of units of ice cream that she buys, We know that PQ increases as P decreases which ean only mean that increases ata faster rate than the rat at which P decreases, Ths i equivalent to saying that demand is very sensitive to 2rie changes, or that her demand for ie cream is quite elastic (€o <1). More generally, recall that when price and (otal revenue (P*Q) move in opposite directions, itis because demand is elastic over that price range. 2.19 For the following pais of goods, would you expect the eross-price elasticity of demand to be positive, negative, or zero? Briefly explain your answers. 4) Tylenol and Advil )DVD players and VCRs©) Hot dogs and buns 8) Since the ewo goods are rather close substitutes for each other, you would expect that the {demand for Tylenol would go up ifthe price of Advil increases and vice versa, Therefore, the ‘ross price elasticity will be positive }) Similar to part (a). Aithough VCRs and DVD players are not very close substitute, ifthe ptice of VCRs were to go ur substantially, potential buyers would probably decide to pay a litle bit more and get the higher-nd DVD player. Similarly ifthe latter becomes expensive, some consumers will nt beable to afford it and will switch to the VCR instead. The elasticity will be positive. ©) Since the two usually go together, a sharp increase inthe price of one will ead toa decline inthe demand forthe othe, and the cross-price elasticity will be negative. 2.20 For the following pars of goods, would you expeet the eross-price elasticity of demand to be positive, negative or 2r0? Briefly explain your answer. 1) Red umbrellas and black umbrellas 1) Coca-Cola and Pepsi «Grape ely and peanut buter {Chocolate chip cookies and mile ‘© Compaters and software 4) Assuming red and back umbrellas are substitutes, we would expect the cross-price elasticity of demand tobe positive. ») Cocacola and Pepsi ar substitutes. We would expect the eros-pric elasticity of demand to be positive. ©) Grape jelly and peanutbuter are rypiclly complements (people want both on ther sandwiches!) We would expect the crossprive elasticity of demand tobe negative 4) Chocolate chip cookie: and mill are ypcelly complements (poople want o consume them ‘ogeher). We would expect the eros-price elasticity of demand to be negative ©) Computers and software are complements (consumers want fo use them together) We would expect the cross prioe elasticity of demand tobe negative.2.21, Suppose thatthe market for sir travel between Chicago and Dallas is served by just two airline, United and American, An economist has studied this market and has estimated thatthe demand curves for round-trip tckets for each airline areas follows: Q'y= 10,000~ 100P, + 99P, (United's demand) Q',= 1000 ~ 100P, + 992 (American's demand) where Po is the price charged by United, and P, isthe price charged by American, 8) Suppose that both American and United charge a price of $300 each for a round-trip ticket between Chicago and Dallas. What isthe price elasticity of demand for United flights between (Chicago and Dats? 'b) What is the market-level pice casticity of demand for ar travel hetween Chicago and Ds ‘when both airines charge a price of $300? (int: Because United and American are the only two airlines serving the Chicago-Dalls market, what isthe equation fr the total demand for air travel between Chicago and Dallas assuming that the artnes charge the same price? of «100-1003 «58000 pee pee sayo-to 222-200 am 1b) Market demand is given by O = Qf +04. Assuming the artines charge the same price we have a (0000-1007, +99P, + 10000-1007, +992, 10000-1007 199? -100P +99P 0000-2 When ?=300, 0 =19400, This implies an elasticity equal to fon 2.) e 19400, 2.25, The demand for dinners inthe only restaurant in town has a unitary price elasticity of ‘demand when the current average pee of a dinner i $8. At that price 120 people eat dinners atthe restaurant every evening 0309 ') Finda linear demand curve that its this information and draw iton a clearly labeled graph. ') Do you nood the information onthe price elasticity of demand to find the curve? Why?16 3) Incase of the linear demand Q= A= BP, we know tat, Using the values of P and Q given inthe problem we have ‘Now we ean solve forthe seeand parameter ofthe finear demand curve 120=0-158) > a=240. Hence the linear demand curve is given by equation Q'= 240 —15P. b) There exist several linear demand eurves for which the demand is equal o 120 at price of $8. Information about elasticity of demand lets us determine exactly one of those. More formally, we nzed second equation to solve for both parameters ofthe linear demand curve 2.27, Ima city the price fora tip on local mass transit (such as the subveny or city bases) bas ‘been 10 pesos fora number ef years Suppose tha the market for trips is characterized hy the following demand curves: in the long run: Q= 30~2P; in the short ran: Q= 18 ~ P?2. Verify that ‘the long-run demand curve “fatter” than the short-run carve. What does this ell you about the sensitivity of demand to price for this good? Discuss why this is the ease, First, consider each demand curve in its “inverse” form: long run demand is P = 15 -0.5Q, and short run demand is P = 30-20. Thus, the slope ofthe long run demand is -0.5, which is closer to zero than that of the skort run demand, ~2, Thus, long run demand is flater. Second, consider the graph below:1530 ‘Again, long ran demand is fatter and thus more sensitive to changes in price, Consider, for instance a price of $10. Quentity demanded is equal in both the long and short runs at P = 10. However, consider increasing the price to, say, $15. Although this will reduce quantity demanded inthe short run bya itl, it would reduce quantity demanded all the way to zero in the long run 2.28, Consider the folowing sequence of events in the US. market for strawberries dn ig the years 1998-2000: + 1998: Uncventful. The market price was $5.00 per bushel, and 4 million bushels were sold. + 1999: There was a scare over the possibilty of contaminated strawhervies from Michigan. The ‘market price was $4.80 per bushel, and 2. million bushels were sold. + 2000; By the beginning of the year, the scare over contaminated strawberries ended when the ‘media reported that the inital reports about the contamination were a hoax. A series of foods in the Midwest, however, destred significant portions of the strawherry field i Towa Missouri The market price was 8.00 per bushel, and 3.5 milion bushels were sold. ind linear demand and supply curves that are consistent with this information, ‘The scare in 1999 would shift demand to the lef, identifying a second point on the supply curv, ‘The information implies that price fell $0.50 while quantity fll 1.5 millon. This implies ae 6 as Using a linear supply curve we then have18 ‘The floods in 2000 wil reduce supply. ‘The shift in supply will identify a second point along the demand curve. Because the scare of 1999 is over, assume that demand has returned to its 1998, state. The change in price and quantity in 2000 imply that price inereased $3.00 and that quantity fell 0.5 million Performing the same exercise as above we have 6 3 3 Using the 1998 price and quantity information along with this result yields Paa-hg" S=a~64) a=29 Finally, plugging these values for @ and & into a linear demand curve results in P=29-60" 60" =29-P 21 og 6 6 CHAPTER 11 Review Question 2, The marginal revenue fora perfectly competitive firm is equal tothe market price. Why is the ‘marginal revenue fora monopolist less than the market price for positive quantities of output?Marginal revenue isles than price for 8 monopolist. This is because as it lowers its price wo things happen. First, the firm's revenue increases from the additional units it ells (these are the marginal units), Second, the Firm's revenue decreases because it loses revenue from selling units ‘ata lover price than it could have had it chosen a lower quantity of output (these are the inffamarginal units). The change in revenue isthe sum of the increase from the marginal units and the decrease from the infamarginal units, This change can be summarized as AIR AP up =518 _ pg AP ag? a9 Since demand is downward sloping, the second term willbe negative implying marginal revenue willbe less than price, 3, Why can monopolist’s marginal revenue be negative for some levels of output? Why is ‘marginal revenue negative when market demand is price inelastic? “The firm's marginal evenuecould be negative ifthe increase in revenue the firm gets ftom selling addtional (marginal) units ata lower price is more than offset by the decrease in revenue ‘rom selling (inftamarginal) units at a lower price than if it had chosen a lower quantity of ‘output If demand is price inelastic tien mao, 1 reali) roof *)0 But, ap. ur= Po? 5 ‘Ths, when demand is prceinlastic, marginal revenue is negative.20 “4. Assume thatthe monopolats marginal cost is postive at all Ievels of output. 4) Truc or fase: When the monopolist operates on the inelastic region ofthe market demand curve, ican always inerease profi by producing less output. ) True or false: When the monopolist operates on the elastic region of the market demand curve it ‘ean always increase profit by producing more output. 8) Tree. Because the fim is operating onthe inelastic region ofthe demand curve marginal revenue isnegative. Thus, ecreasing output will increase total revenue. And, sine output is Tower, total cost wil be lower. Thus, by decreasing output and increasing price the firm ean increase profit b) False. When the firm operates on the elastic portion of the market demand curve, increasing output will increase total revenue. In addition, inereasing output will increase total, costs, Thus, the effect on profit wll depend on how eosts increase in relation to revenue. '. Atthe quantity of output at which the monopolist maximizes total profit i the monopolis's {otal revenue maximized? Explain, ‘The frm will not be maximizing total revenue atthe point where the frm maximizes total profit. ‘The firm maximizes revenue atthe point where MR-=0 and the firm maximizes profit a the point where MR = MC. Ths, less IMC =0, the fim will nt maximize both revenue and profit at the same point 6. What isthe IEPR? How docs it relate to the monopolist’s profit-maximizing condition, MR=MC? TEPR isthe Inverse Elasticity Pricing Rule. This rule states that a profit- maximizing fim that sets MR = MC will satisfy te condition that PHM where the asterisks indicate the price and marginal cos tthe profit-maximizing level of output. 7. Evaluate the following statement: Toyota faces compet ‘the world market for autonobil ion from many other firms in uerefore, Toyota cannot have market power. ‘While perfectly competitive firms do not have market power, it is not true that any firm that aces competition does not have market power. In this particular example, while Toyota clearly has competition, Toyota also sells a differentiated product from the other automobile ‘manufacturers. This will llow Toyota to contro its price since no other manufacturer is producing the identical product. Thus, Toyota will have some market power. Itis true, however,2 that this market power may be limited by the prices other manufacturers set for their automobiles. If Toyota’ product is not seen as being much different from other autos, it will not be able to seta price far out of line withthe rest ofthe auto market. Problems 114. Suppose thatthe market demand curve is given by Q= 100 -5P_ 8) What isthe inverse market demand curve? 1) Whats the average revenue funetion fora monopolist in this market? ©) What ‘he marginal evcoue function that corresponds to this demand curve? 8) Ifdemand is given by Q=100—SP,, inverse demand is found by solving for P . This implies inverse demand is P=20~4Q. b) Average revenue is pve anaTh PQ go ‘Therefore, average revenue will be P =20-%Q. ©) Fora linear demand curve P = a—6Q, marginal revenue is given by MR =a-2bQ. In ‘this instance demand is 0% implying marginal revenue is MR = 20~%Q. ee 4) Wat th mara veneer? oo ee ‘same vertical intercept and twice the slop as the demand curve. ‘Thus, MR = 40-40. +b) Total revenue will be maximized when MR = 0, of when Q= 10. At that quantity, the price wil be P = 40-20 = 20. Total revenue is PO = 20(10) = 200. 113. Show thatthe price elasticity of demand is-1ifand only ifthe marginal revenue is zero. P20. ep ©, which is equivalent to 1/ vie rioM fin Si] fie 2] see P>o.ue-ostnenyt1+(Ua “1 or gos2 115, A monopolist operates in an industry where the demand curve is given by Q= 1000 -20P. The ‘monopolst’s constant marginal cost i¢ $8. What I the monopolist’sprofit-maximizing price? ‘Recall that the MR curve can easily be derived from the demand curve when the latter is written in the inverse form. The inverse demand curve is P » 50 ~ (Q/20) so the marginal revenue curve is P = 50 (Q/10) (using the fact thatthe slope of the MR curve is twice that ofthe inverse demand curve, with the samo intercept) Using the rule MR=IMC, we get 50 ~ (Q/10) = 8, so 420, Plugging this back into the demand eurve (or the inverse demand curve) we can calculate the profit maximizing price, P= 29. 11.7. A monopolist operates with the following data on cost and demand. It has a total fixed cost of ‘1,400 and a total variable cst of Q, where Qs the number of units of output i produces. The ‘firm's demand curve is P= $120 -20. The size of is sunk cost i $600. The frm expeets the ‘conditions of demand and cost to continue inthe foreseeable future. 4) Whats the flrm’s profitifit operates and it maximizes profit? by Should the firm continue w operate in the short run, or should it shut down? Explain. 8) Themonopolist chooss Q so that MR = MC: 120 4Q=20 => Q=20. P= 120-220)=80. Profit= PO = V—F=80(20) 20" “The fim has nonsunk Fixed cost: Fy = F- Foun = 1400 ~600 = 800. 1b) Produver surplus PQ—V — Frans = 8020) 20° — 800 ~ 400. So the frm should continue to ‘operate inthe short run. it operates is profit is-200. But iit shuts down, its profit = - Foy =-600. So ican essen ts losses by 400i it continues to operat and his is why’ producer surplus is +400 annually) 11.10, Assume that a monopolist sells a product with the cost function C= +200, where Cis total ‘cost, Fis. fixed cost, and Qs the level of output. The inverse demand function is P= 60 Q, where isthe price in the market. The firm will earn zero economic profit when it charges a price of 30 (dis snot the price that maximizes profit). How much profit does the firm earn when it charges the price that maximizes profit? When the P= 30, the demand unction shows that Q= 30 At that rice, profit= 0 = PQ C= (30)30) ~F ~20(0}; therefore F = 300, So ttl cost is C= 300-200. [Now id the quantity that maximizes profit Set MR = MC. MR = 60 ~29 and MC 20. 60 ~20= 20 implies that Q=20 and P= 40. So, the profit maximizing proft will be PQ—C (40)20) 30020420) ~ 100,23 LAL. Assume that a monopolist sells a produet with a total cost function 7C= 1,200+0.5Q" and a ‘corresponding marginal cost function MC'= Q. The market demand curve given by the equation 00-0. 18) Find the profit maximizing output and price for this monopolist. Ts the monopolist profit by Cateulate the price elasticity of demand atthe monopolst’s profi-maximizing price, Alo ‘caleulate the marginal cost athe monopols’s profit-maximizing output. Verify that the TEPR holds. 8) If demand is given by P=300-Q then MR =300-20. To find the optimum set MR=MC, At Q=100 price will be P=300-100=200. At this price and quantity total revenue will be TR =200(100) =20,000 and total cost will be TC =1200+. (100)? =6,200. Therefore, the firm will eam a profitof x =7R~TC =13,800. b) The price elasticity at the profitmaximizing price is 4a. aro ‘With the demand curve 9 =300~P, "%, (2 fer =—"i00, be 1. Therefore, at the profit-maximizing price ‘The marginal cost at the pro‘t-maximizing output is MC=Q™= 100. The inverse elasticity pricing rue states that atthe profit-maximizing price In this ease we have200-100 200 ‘Thus, the TEPR holds for this monopolist. 1 a 4