EF3442 - Quiz 1

Not for distribution beyond the class

A monopolist faces the following demand relationship: where is demand and

is the price per unit. The fixed costs of production are $20, and her cost of production is a constant
$10 a unit.

a. What is her profit-maximizing price?

b. What is the profit-maximizing level of output?

c. What is the maximum amount of profit?

d. Suppose instead the monopolist must pay a tax of $2 on every unit produced. What is her new
profit-maximizing price?

Solution:
a. Answer:
Justification:

The monopolist's profit is

As the second derivative is negative, the first-order condition suffices.

First order condition: .

Finally, . Therefore, the profit-maximizing price is

.

b. Answer:

c. Answer:

d. Answer:
Justification:

The SOC holds, so this is indeed profit maximizing.