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Assignment 6B

The profit-maximizing price-quantity combination for the monopoly firm is: 1) Price of $210 and quantity of 30 units 2) This results in maximum profits of $3,000 3) The demand is elastic at this combination

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468 views

Assignment 6B

The profit-maximizing price-quantity combination for the monopoly firm is: 1) Price of $210 and quantity of 30 units 2) This results in maximum profits of $3,000 3) The demand is elastic at this combination

Uploaded by

Reniella Alleje
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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GROUP 7 1A12

Bayangan, Krizzha November 10, 2021


Duqueza, Maria Andrea
Tinio, Hanne Karla

MODULE 6B ASSIGNMENT

4. You are the manager of a monopoly, and your demand and cost functions are given by
2
𝑃 = 300 − 3𝑄 and 𝐶(𝑄) = 1, 500 + 2𝑄 , respectively. (LO3, LO4)
a. What price-quantity combination maximizes your firm’s profits?
Price = 300 - 3Q
2
Cost (Q) = 1500 + 2𝑄
2−1
Marginal Cost (MC) = 2(2) 𝑄
Marginal Revenue (MR) = 300 - 6Q

Marginal Revenue (MR) = Marginal Cost


300 - 6Q = 4Q
300 = 10Q
Q= 30 units

P = 300 - 3 (30)
= 300 - 90
= $210
Hence, the price is $210 and the quantity is 10 units that maximize the monopoly firm's
profit

b. Calculate the maximum profits.


Revenue (R) = Price * Quantity
= 210 * 30
= $6 300

2
Cost (C) = 1500 + 2 (30)
= $3 300

Profit = Revenue - Cost


= $6300 - $3300
=$3000

c. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price-quantity


combination?
MR = 300 - 6(30) = 120 ; MR >0
Therefore, the demand is elastic
d. What price-quantity combination maximizes revenue?
TR is maximized when MR = 0. Setting MR = 0 gets us:
MR = 300 - 6Q
0 = 300 - 6Q
6Q = 300
Q = 50 units

P = 300 - 3 (5)
= $150
e. Calculate the maximum revenue.
Revenue = Profit * Quantity
= 150 * 50
= $7500

f. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price-quantity


combination?
At the given revenue-maximizing and price-quantity combination, demand is unit elastic.

6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a
monopolist. (LO1, LO3, LO5)

a. Determine the profit-maximizing output and price.


Q when MC = MR
Q (m) = 3
P (m) = 70

b. What price and output would prevail if this firm’s product were sold by price-taking firms
in a perfectly competitive market?
P when Q when MC = D
Pe = 60
Qe = 4
c. Calculate the deadweight loss of this monopoly.
Find deadweight loss
DWL = Pm - Pe
= ½ (70 - 40)
= $15

8. The elasticity of demand for a firm’s product is -2.5 and its advertising elasticity of demand is
0.2. (LO8)
a. Determine the firm’s optimal advertising-to-sales ratio.
𝐴 𝐸𝑄,𝐴
𝑅
= 𝐸𝑄,𝑅
𝐴 0.2
𝑅
= −2.5
𝐴
𝑅
= 0. 08
Given that the ratio from the equation is -0.08, the absolute value is 0.08. Thus, the
firm’s optimal advertising-to-sales ratio is 0.08

b. If the firm’s revenues are $40,000, what is the profit-maximizing level of advertising?
Revenue * Advertising-to-Sales Ratio
$40,000 * 0.08
$3,200
The profit-maximizing level of advertising is $3,200.

9. A monopolist’s inverse demand function is 𝑃 = 150 − 3𝑄. The company produces output at
two facilities; the marginal cost of producing at facility 1 is 𝑀𝐶1(𝑄1) = 6𝑄1 , and the marginal
cost of producing at facility 2 is 𝑀𝐶2(𝑄2) = 2𝑄2. (LO1, LO8)
a. Provide the equation for the monopolist’s marginal revenue function. (Hint: that
𝑄1 + 𝑄2 = 𝑄.)
Since Q = Q1 + Q2, we know that:
P = 150 - 2(3Q)
MR(Q) = 150 - 2(3Q)

b. Determine the profit-maximizing level of output for each facility.


MR = MC(𝑄1)
𝑀𝐶1(𝑄1) = 6𝑄1
150 - 6Q = 6Q
150 = 12Q
𝑄1= 150/12
𝑄1= 12.5
𝑀𝐶2(𝑄2) = 2𝑄2
150 - 6Q = 2Q
150 = 8Q
𝑄2= 150/8
𝑄2= 18.75

c. Determine the profit-maximizing price.


P = 150 - 3Q

𝑄1= 12.5
𝑃1= 150 - 3(12.5)
𝑃1= 112.5

𝑄2= 18.75
𝑃2= 150 - 3(18.75)
𝑃2= 93.75

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