Jennifer Carlise / 2301892036

International Marketing (LD23)

1. Monopoly
A monopoly refers to when a company and its product offerings dominate a sector or
industry. Monopolies can be considered an extreme result of free-market capitalism in that
absent any restriction or restraints, a single company or group becomes large enough to
own all or nearly all of the market (goods, supplies, commodities, infrastructure, and assets)
for a particular type of product or service. The term monopoly is often used to describe an
entity that has total or near-total control of a market.

a. Average revenue refers to the revenue obtained by the seller by selling the per unit
commodity. It is obtained by dividing the total revenue by total output. It plays a role
in the determination of a monopoly's profit. Per unit profit is average revenue minus
average (total) cost. A monopoly generally seeks to produce the quantity of output
that maximizes profit.

Marginal revenue is the increase in revenue that results from the sale of one
additional unit of output. Marginal revenue is the net revenue obtained by selling an
additional unit of the commodity. Marginal revenue is the change in total revenue
which results from the sale of one more or one less unit of output. Thus, marginal
revenue is the addition made to the total revenue by selling one more unit of the
good. In algebraic terms, marginal revenue is the net addition to the total revenue by
selling n units of a commodity instead of n – 1.
b. The Monopolist’s Output Decision
In monopolistic competition, firms make price/output decisions as if they were a
monopoly. In other words, they will produce where marginal revenue equals
marginal cost. It is behaving as a monopolist. Its price is greater than average cost so
it realizes an economic profit. Profit is maximized when Marginal Revenue equals
with Marginal Cost. If the firm produces a smaller output, it sacrifices some profit
because the extra revenue that could be earned from producing and selling the units
between those units exceeds the cost of producing them. Similarly, expanding
output would reduce profit because the additional cost would exceed the additional
revenue.

c. A Rule of Thumb for Pricing

Pricing is complex, which is why we love it. But we additionally love the ones
rare times where we can use easy policies of thumb as a shortcut. We’ve been using
this one for years:
 By genuinely taking one over your GM% rate, you could find a breakpoint on your
elasticity. Here’s an example:
Let’s say you’re making 20% margin in your products. The math is pretty easy:
-1/20% is -5. That -5 result might need to be your elasticity if you’re maximizing your
GM dollars. To bring the -five elasticity degree to life, ask yourself the following
question. If you have been to take 10% off your prices, might your unit quantity cross
up by:
 Less than 50%? Then you’re priced too low.
 About 50%? You’re approximately proper for earnings maximizing price.
 More than 50%? Then you’re priced too high.
We’ve spoken at length before about how there’s extra to pricing than simple profit,
but it’s always reachable to have something a simple notion test to help manual the
math.

d. Shift in the demand

A shift in the demand curve is when a determinant of demand other than
price changes. It occurs when demand for goods and services changes even though
the price didn't. In a competitive market, there is a relationship between price and
the quantity supplied. That relationship is the supply curve which tells us how much
will be produced at every price. A monopolist has no supply curve. There is no one-
to-one relationship between price and the quantity supplied.
The reason is that the monopolist’s output decision depends not only on the MC, but
also on the shape of the demand curve. As a result, shifts in demand do not trace out
a series of prices and quantities, as happens in a competitive market. Instead, shift in
demand may lead to changes in price with no change in output, changes in output
with no change in price, or changes in both.

(a) and (b) show this. In figure (a), the demand curve is initially D1, the
corresponding MR curve is MR1, and the monopolist’s initial price and quantity are
P1 and Q1. In figure (a) the demand curve shifted down and related the new demand
and MR curves are shown as D2 and MR2. The MR2 intersects the MC curve at the
same point as MR1 does. As a result, the quantity produced remains unchanged but
the price falls to P2.
 In figure (b) the demand curve is shifted up. The new MR curve, MR2, intersects the
MC curve at a larger quantity Q2. But the shift in the demand curve is such that the
price charged is the same. Shifts in demand usually cause changes in both quantity
and price. But the case shown in figure (a) and (b) illustrates an important distinction
between competitive supply and monopoly. In the case of a competitive industry, a
specific quantity is supplied at each price. No such relationship exists for a
monopolist.

e. The effect of a Tax.

There are two types of sales tax—ad valorem tax which is imposed as a percentage
of price, and per unit tax which is imposed on per unit sold. The case of sales tax—
whether it is imposed on per unit basis or on ad valorem basis —is different. This is
because this type of tax is just an addition to variable cost of the monopoly firm. So,
not only MC curve but also AC curve will shift in the upward direction. For
simplicity’s sake, we have drawn only the MC curve and not the AC curve.

Effect of Taxes on the Equilibrium of the Monopolist Type;

 Imposition of a Lump-Sum tax:
Imposition of lump sum tax and profit tax simply reduces excess profits of the
monopolist since these two taxes are an addition to the total fixed cost. If the
government imposes a 20% tax on profit of a monopolist then the fixed cost
of the monopoly firm will go up since this type of tax is like a fixed cost. Same
is true with respect to lump sum tax. Under these conditions, the imposition
of a lump-sum tax will’ reduce the excess profits of the monopolist because it
will increase his total fixed cost However, the MC curve of the monopolist will
not be affected, the equilibrium in the monopoly market will remain the
same.
 Imposition of Profit Tax:
The effects of taxes on the monopoly profits are the same as in the case of a
lump-sum tax The profits tax reduces the monopoly profits, but the
equilibrium of the market is not affected so long as the tax does not exceed
 the normal profits of the monopolist, since, in this case the monopolist will
not cover his total costs and will close down.
 Imposition of Specific Tax:
The effects of a specific tax on the output of the monopolist are broadly the
same as those in a purely competitive market. The imposition of the specific
tax will shift the MC curve of the monopolist upwards which will change the
equilibrium; in the new equilibrium position (e’), the price will be higher and
the quantity smaller as compared with the initial equilibrium. This is the same
prediction as with the model of perfect competition.

f. The Multiplant firm

A multiplant monopoly is given in monopolistic firms that have their production
divided into more than one production plant, each one having its own cost structure.
Different cost stuctures give place to different marginal costs and hence each
production plant will have to choose the individual production output level following
the maximising principle. For a monopoly with two plants, we have

where x1 and x2 are the same product, but produced at different plants. This
multiplant monopoly will maximise its profits when

where MR is the marginal revenue and MC is the marginal cost in each plant.

The multiplant monopolist will need to decide whether to produce in both plants or
just in one plant. This decision depends on each plant’s marginal costs. If it has
increasing marginal costs, the multiplant monopoly will produce in either plant,
taking into account the marginal total cost of both firms. If there are decreasing
marginal costs, it will produce only in one plant, the one with the steepest marginal
cost curve, provided it has equal or lower fixed costs than the other plant.

If marginal costs are constant and equal in both plants, the multiplant monopolist
can produce in either plant, as long as capacity allows it (see figure below). If
demand can be reached with only one plant, the others must be shut down.
 If marginal costs are constant but different in each plant, production should take
place only in the plant with lowest marginal costs, as long as maximum capacity is
not reached. When this maximum capacity is reached, production will be moved to
the other plant, as shown in the figure below.

2. Monopoly Power
a. Production, Price, and Monopoly Power
When we discuss a monopoly, or oligopoly, etc. we're discussing the market for a
particular type of product, such as toasters or DVD players. In the textbook case of a
monopoly, there is only one firm producing the good. In a real-world monopoly, such as
the operating system monopoly, there is one firm that provides the overwhelming
majority of sales (Microsoft), and a handful of small companies that have little or no
impact on the dominant firm.
Because there is only one firm (or essentially only one firm) in a monopoly, the
monopoly's firm demand curve is identical to the market demand curve, and the
monopoly firm need not consider what it's competitors are pricing at. Thus a monopolist
will keep selling units so long as the extra amount he receives by selling an extra unit
(the marginal revenue) is greater than the additional costs he faces in producing and
selling an additional unit (the marginal cost). Thus the monopoly firm will always set
their quantity at the level where marginal cost is equal to marginal revenue.
For this market to remain a monopolistic one, there must be some barrier to entry. A
few common ones are:
 Legal Barriers to Entry
This is a situation where a law prevents other firms from entering the market to
sell a product.
 Patents
They're important enough to be given their own section. A patent gives the
inventor of a product a monopoly in producing and selling that product for a
limited amount of time.
 Natural Barriers to Entry
These type of monopolies, other firms cannot enter the market because either
the startup costs are too high, or the cost structure of the market gives an
advantage to the largest firm. Most public utilities would fall into this category.
Economists generally refer to these monopolies as natural monopolies.
b. Measuring Monopoly Power

The Lerner Index of Monopoly Power Economists use the Lerner Index to
measure monopoly power, also called market power. The index is the percent
markup of price over marginal cost.

L = (P – MC)/P

The Lerner Index is a positive number (L >= 0), increasing in the amount of
market power. A perfectly competitive firm has a Lerner Index equal to zero (L =
0), since price is equal to marginal cost (P = MC). A monopolist will have a Lerner
Index greater than zero, and the index will be determined by the amount of
market power that the firm has. A larger Lerner Index indicates more market
power.

A Pricing Rule was derived:

(P – MC)/P = -1/Ed , where Ed is the price elasticity of demand. Substitution of

this pricing rule into the definition of the Lerner Index provides the relationship
between the percent markup and the price elasticity of demand.

L = (P – MC)/P = -1/Ed

An example of a Lerner Index might be Big Macs. There are substitutes available
for Big Macs, so if the price increases, consumers can buy a competing brand
such as Whoppers. In this case, the price elasticity of demand is larger (more
elastic), causing the percent markup to be smaller: the Lerner Index is relatively
small. A monopoly is defined as a single seller in an industry with no close
substitutes. Therefore, a monopoly will have a higher Lerner Index.

A second pricing rule can be derived from equation, if we assume that the firm
maximized profits (MR = MC). In that case, the relationship between price and
marginal revenue is equal to:

MR = P(1 + 1/Ed ).

If profit-maximization is assumed, then: MC = P(1 + 1/Ed )

Rearranging:
P = MC/(1 + 1/Ed )

This is a useful equation, as it relates price to marginal cost.

A monopoly example is useful to review monopoly and the Lerner Index.

Suppose that the inverse demand curve facing a monopoly is given by: P = 500 –
10Q. The monopoly production costs are given by: C(Q) = 10Q2 + 100Q. Profit-
maximization yields the optimal monopoly price and quantity.
 max π = TR – TC
= P(Q)Q – C(Q)

= (500 – 10Q)Q – (10Q2 + 100Q)

= 500Q – 10Q2 – 10Q2 - 100Q ∂π/∂Q = 500 – 20Q – 20Q - 100 = 0 40Q = 400
Q* = 10 units

P* = 500 - 10Q* = 500 – 100

= 400 USD/unit.

To calculate the value of the Lerner Index, price and marginal cost are needed.

MC = C’(Q) = 20Q + 100.

MC* = 20(10) + 100 = 300 units

L = (P – MC)/P
= (400 – 300)/400 = 100/400 = 0.25

This result can be checked with the pricing rule: (P – MC)/P = -1/Ed . Ed = (∂Q/∂P)
(P/Q)

For this monopoly, ∂P/∂Q = -10.

This is the first derivative of the inverse demand function. Therefore,

∂Q/∂P = -1/10.
Ed = (∂Q/∂P)(P/Q)

= (-1/10)(400/10)

= -400/100 = -4.

L = (P – MC)/P = -1/Ed = -1/-4 = 0.25. The same result was achieved using both
methods, so the Lerner Index for this monopoly is equal to 0.25.

c. The Rule of Thumb for Pricing

We realize that charge and output ought to be chosen so that MR = MC, but how
does the manager of a corporation find the correct rate and output level, in practice?
Managers may also have most effective limited information of the AR and MR that
their companies face. Similarly, they may have little understanding approximately
the corporation’s MC curve. Thus, we want to translate the condition that MR ought
to equal MC right into a rule of thumb that may be more effortlessly carried out in
practice.
 To do this, we write the expression MR = dR/dQ = d (PQ)/Q

It may be mentioned that the extra sales from an incremental unit of quantity,
d(PQ)/dQ, has components. Producing one extra unit of output and selling at fee P
brings in revenue of (1)(P) = P. Since the corporation faces a downward-sloping
demand curve, producing and selling an extra unit also effects in a small drop in
charge dP/dQ, which reduces the revenue from all devices sold. Thus, MR = Q dP/dQ
=P+P (p/Q)(dP/dQ)

We locate the expression on the proper with the aid of taking the term Q(dP/dQ)
and multiplying and dividing it via P. The elasticity of demand is defined as Ed = (P/Q)
(dP/dQ). Hence, (Q/P)(dP/ dQ) is reciprocal of the pliability of call for, 1/Ed,
measured at the profit-maximising output, and MR = P + P(1/Ed).

Now, since the goal of the company is to maximize profit, we will equate MR = MC: P
+ P (1/Ed) – MC, which can be rearranged to present us

P-MC/P = 1 /Ed.............(1)

This provides a rule of thumb for pricing. The term P-MC/P is the markup over MC as
a percent of rate which states that this mark-up should equal minus the inverse of
the pliability of demand.

Equivalently, we are able to rearrange this as:

P = MC/1+(1/Ed)
For example, if the pliability of call for is -4 and MC – £9 in line with unit, P = £ 9 /(1-
1/4) = £ 9×4/3 = £12 in step with unit.

How does the fee fixed by means of a monopolist evaluate with the charge under
competition? In a perfectly aggressive marketplace, as we know, P = MC. A
monopolist fees a fee that exceeds MC, by using an quantity that relies upon
inversely on the elasticity of demand.

As the mark up equation (1) shows, if the call for is extremely elastic, Ed is a large
negative number, and P can be very near MC, so the monopolised market looks

much like a aggressive one. In fact, when call for could be very elastic, there's very
little advantage to being a monopolist.

3. Sources of Monopoly Power

a. The Elasticity of Market Demand
If the elasticity of demand is low, a firm is in a better position to charge a price higher
than its marginal cost. If close substitutes exist and hence the elasticity of demand is
high, even a single firm can’t increase price beyond some reasonable range. For
example, if people could switch to other word processors easily, elasticity of demand
for Microsoft Word would be low and Microsoft wouldn’t enjoy a near-monopoly in
the market.Since a monopolist faces a downward-sloping demand curve. It shows
 that in order to increase its revenue by one unit, a monopolist must reduce its
market price. The first factor on the right-hand side of the equation i.e. P represents
the revenue from additional unit sold and the second factor (Q × ∆P/∆Q) represents
the loss in revenue from reduction in market price. Multiplying and dividing the
right-hand side by P, we get a relationship between a firm’s elasticity of demand and
its marginal revenue.

b. The Number of firms

A monopoly exists in regions in which one company, firm, or entity is the only—or
dominant—force that sells a product or service in an industry. This offers the entity
enough electricity to keep other competitors far away from the marketplace. This
might also be because of the industry's requirement for technology, excessive
capital, authorities regulation, patents, and/or excessive distribution overheads.If
the number of firms increases, monopoly power decreases. Especially if they are
having your market share in the market. Highly concentrated markets are those
where only a few firms acquire most of the sales. So in such cases, as we studied in
the very beginning of this chapter, monopoly has barriers to entry to keep firms out
of the market. For example Patents, copyrights, license etc.

c. The Interaction Among Firms

Firms typically appear and end up every day as an alternative to character exchange
when it's miles extra efficient to supply in a non-marketplace environment. For
example, in a labor market, it might be too difficult or steeply-priced for corporations
or groups to have interaction in manufacturing when they have to rent and fireplace
their workers depending on demand/deliver conditions. While the benefits of
consolidation for performance are potentially many and varied, the underlying
concept is that integrating operational paradigms.

4. The social costs of monopoly power

a. Rent seeking
 Rent seeking is an economic concept occurring when an entity seeks to gain
wealth without reciprocal contribution of productivity.
 The term rent in rent seeking is based on an economic rent which was defined by
economist Adam Smith to mean payments made in excess of resource costs.

 An example of rent seeking is when a company lobbies the government for

grants, subsidies, or tariff protection.
 Rent seeking is a byproduct of political legislation and government funding.
Politicians decide the laws, regulations, and funding allocations that govern
industries and government subsidy distributions. These legislations and actions
therefore manifest rent seeking behaviors by offering economic rent with little or
no reciprocity.
 Governments have established funding for a variety of social service programs.
Business social service programs are typically designed to provide aid for
businesses with the goal of helping economic prosperity. Individual social service
funding is provided for the goals of wellness and human welfare. Businesses can
 lobby the government for help in the areas of competition, special subsidies,
grants, and tariff protection. If a business succeeds in getting laws passed to limit
their competition or create barriers to entry for others it can achieve economic
rents without any added productivity or capital at risk.
 Individual rent seekers are also able to achieve economic rents when obtaining
social service funding. Funds are offered through welfare programs, housing
assistance, and Medicaid. Individual rent seekers can use their eligibility status
for these programs to obtain funds from the government without any reciprocal
contribution.

b. Price regulation

In a monopoly, there is no supply curve because monopolists are price setters and
not price takers. In the graph on the left, the MC curve is not the firm’s supply curve.
In a competitive market, firms have to passively take the market price as given. The
supply curve describes the quantities they will put on the market at any given price.
If the firm is a monopoly it does not need that information because it is setting the
price. In a competitive market, marginal cost tells us the social cost of producing a
product, and the demand curve tells us the social benefit of producing the product.
The competitive price/output is determined where marginal cost intersects the
demand curve, as on the left. Recall from previous lectures that at the competitive
price/output combination social value is maximized. Recall from the monopoly
lectures that a monopolist restricts the output to the point at which MC = MR and
increases the price to what the market will bear. The result of a monopoly is
restricted output and higher price. Because of the monopolist’s restriction of output,
you can see that there are people who would be willing to pay up to the marginal
cost who are not being served. The reduced output is the difference between Qc -
Qm. The shaded area in the graph on the left represents the loss of economic value
from a monopoly The loss is called deadweight loss.

c. Natural Monopoly

A natural monopoly is a type of monopoly that arises due to natural market forces. A
company with a natural monopoly might be the only provider or a product or service
in an industry or geographic location. Natural monopolies are allowed when a single
company can supply a product or service at a lower cost than any potential
competitor, but are often heavily regulated to protect consumers.

Some monopolies use tactics to gain an unfair advantage by using collusion, mergers,
acquisitions, and hostile takeovers. Collusion might involve two rival competitors
conspiring together to gain an unfair market advantage through coordinated price
fixing or increases.

Instead, natural monopolies occur in two ways. First, is when a company takes
advantage of an industry's high barriers to entry to create a "moat", or protective
wall, around its business operations. The high barriers to entry are often due to the
significant amount of capital or cash needed to purchase fixed assets, which are
 physical assets a company needs to operate. Manufacturing plants, specialized
machinery, and equipment are all fixed assets that might prevent a new company
from entering an industry due to their high costs. The second is where producing at a
large scale is so much more efficient than small scale production, that a single large
producer is sufficient to satisfy all available market demand. Because their costs are
higher, small scale producers can simply never compete with the larger, lower cost
producer. In this case, the natural monopoly of the single large producer is also the
most economically efficient way to produce the good in question. This kind of
natural monopoly is not due to large scale fixed assets or investment, but, can be the
result of the simple first mover advantage, increasing returns to centralizing
information and decision making, or network effects.

d. Regulation in Practice

The societal and economic dangers of monopolies are clear. To fight the results of these
massive corporations, the government has attempted, thru both rules and courtroom cases,
to adjust monopolistic businesses. Though the strategies that the US has accompanied have
varied, the intention of curbing market hegemony has been relatively constant. Though
examples of tries at authorities regulation are widespread, 3 stand out from the rest:
railroads of the nineteenth Century, Microsoft, and IBM.

Most law in its early records revolved across the railroad industry. At first, the responsibility
of manage of public industries fell on the individual states. However, the ineffectual law that
changed into surpassed and the inability to govern railroad monopolies made the want for
federal regulation painfully apparent. The passage of the Interstate Commerce Act in 1887
created the first interstate regulatory committee. Though this group was not extremely
effective in curbing the practices of the railroad, the precedent for federal law have been
set. Later law, including the Sherman and Clayton Anti-Trust Acts had more of an impact on
large businesses. The latter bill created the Federal Trade Commission, that's the major
regulatory body of monopolies today.

The crucial query that arises from regulation is: Why does the government sense that it
must control large businesses? Does this now not violate the principles of

freedom outlined in the Constitution? Indeed, the government never attempted to stifle a
organisation clearly as it changed into strong. Instead, regulation exists to preserve
opposition and the freedom for smaller businesses to enter the market. If one employer
controls the market share, smaller groups will by no means be able to flourish. For example,
the dominance of Microsoft in recent years has raised the query of whether or not its
practices are monopolistic. Because the agency controls the majority of the market in
almost all of its markets, there may be an overwhelming social strain for regulation.

The earliest regulatory measures had been not as centered on competition, however. The
goal turned into to shield the consumer. For example, the Grangers (nineteenth Century
farmers) felt that they have been being oppressed by using unfair practices of the railroads.
There changed into amazing social unrest in this population farmers. It become now not till
the give up of the 19th Century and the beginning of the 20 th that law made the turn closer
to preserving competition.

Another trend in law is the unlucky tendency of rules to have little impact. Most of the legal
guidelines created to govern railroads were actually overlooked via the huge corporations.
Similarly, the movement of the Federal Trade Commission against Microsoft is frequently
viewed as a trifle. Judge Stanley Sporkin rejected the June 1995 decision concerning the
Microsoft monopoly, saying that the ruling changed into a mockery and that stricter manage
have to be taken. Most tries at federal regulation have been mediated, modulated, or
amended till they lose an awful lot of their unique bite.

Clearly social and governmental records has proven an ever-present desire to shrink the
boom of corporations. The risks of allowing one business enterprise to count on supremacy
over a market have anxious the authorities into law. Though, in many instances, the
regulation fails to attain its unique aim, governmental law has turn out to be a standard in
interstate and worldwide commerce. America changed into based on the principle of free
trade and freedom of opposition. Therefore, the government has assumed the obligation of
preventing the formation of monopolies and curtailing unfair practices of huge corporations

EXERCISES

MC
P .
P  MC 1   1 
 , 1    
1. The monopolist’s pricing rule is: P Ed or alternatively,   Ed  
MC
P  2 MC.
 1 
1  
Therefore, price should be set so that  2  With MC = 20, the optimal
price is P = 2(20) = $40.

If MC increases by 25% to $25, the new optimal price is P = 2(25) = $50, a 25% increase.
So if marginal cost increases by 25%, the price also increases by 25%.

2. a. The profit-maximizing output is found by setting marginal revenue equal to

marginal cost.  Given a linear demand curve in inverse form, P = 120 - 0.02Q, we
know that the marginal revenue curve will have twice the slope of the demand
curve.  Thus, the marginal revenue curve for the firm is MR = 120 -
0.04Q.  Marginal cost is simply the slope of the total cost curve.  The slope of TC =
60Q + 25,000 is 60, so MC equals 60. Setting MR = MC to determine the profit-
maximizing quantity:
120 - 0.04Q = 60, or
Q = 1,500.
Substituting the profit-maximizing quantity into the inverse demand function
to determine the price:
P = 120 - (0.02)(1,500) = 90 cents.
 Profit equals total revenue minus total cost:
p = (90)(1,500) - (25,000 + (60)(1,500)), or
p = $200 per week.
b. Suppose initially that the consumers must pay the tax to the
government.  Since the total price (including the tax) consumers would be
willing to pay remains unchanged, we know that the demand function is
P* + T = 120 - 0.02Q,  or
     P* = 120 - 0.02Q - T,
where P* is the price received by the suppliers.  Because the tax increases the
price of each unit, total revenue for the monopolist decreases by TQ, and
marginal revenue, the revenue on each additional unit, decreases by T:
MR = 120 - 0.04Q - T
where T = 14 cents.  To determine the profit-maximizing level of output with
the tax, equate marginal revenue with marginal cost:
120 - 0.04Q - 14 = 60, or
Q = 1,150 units.
Substituting Q into the demand function to determine price:
P* = 120 - (0.02)(1,150) - 14 = 83 cents.
Profit is total revenue minus total cost:

cents, or
$14.50 per week.

3. a. If the elasticity of demand for the product is -2, find the marginal cost of the last
unit produced.
The monopolist’s pricing rule as a function of the elasticity of demand is:
( P  MC ) 1

P Ed
or alternatively,
 1 
P 1    MC
 Ed 
Substitute -2 for the elasticity and 40 for price, and then solve for MC = $20.

b. What is the firm’s percentage markup of price over marginal cost?

(P - MC)/P = (40 - 20)/40 = 0.5, so the markup is 50% of the price.
c. Suppose that the average cost of the last unit produced is $15 and the firm’s fixed
cost is $2000. Find the firm’s profit.
Total revenue is price times quantity, or $40(800) = $32,000. Total cost is equal to
average cost times quantity, or $15(800) = $12,000. Profit is therefore $32,000 -
12,000 = $20,000. Fixed cost is already included in average cost, so we do not use
the $2000 fixed cost figure separately.