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Topic 8

This document contains solutions to multiple optimization problems for a firm. Problem 1 involves calculating marginal revenue, marginal cost, profit-maximizing quantity and price for a monopoly. The monopoly will produce 6 units and charge $5.50 per unit, earning $17 in profit. Problem 2 analyzes a firm with demand of P=100-Q and costs of TC=500+4Q+Q^2. This is not a competitive firm. Maximum total revenue is $2500 at a quantity of 50 units. Profit is maximized at a quantity of 24 units and price of $76, earning $652 in profit. Problems 2d and 2e examine how a per-unit tax

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39 views2 pages

Topic 8

This document contains solutions to multiple optimization problems for a firm. Problem 1 involves calculating marginal revenue, marginal cost, profit-maximizing quantity and price for a monopoly. The monopoly will produce 6 units and charge $5.50 per unit, earning $17 in profit. Problem 2 analyzes a firm with demand of P=100-Q and costs of TC=500+4Q+Q^2. This is not a competitive firm. Maximum total revenue is $2500 at a quantity of 50 units. Profit is maximized at a quantity of 24 units and price of $76, earning $652 in profit. Problems 2d and 2e examine how a per-unit tax

Uploaded by

Phương Huyền Hoàng
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Multiple choices

1.D 2.B 3.A 4.C 5.C 6.C 7.C

Problem 1 :

a) Complete the table :

Quantity Price ($) Total Marginal Total Average total Marginal


revenue ($) revenue ($) cost ($) cost ($) cost ($)

0 8.5 0 _ 5 _ _

1 8.0 8.0 8.0 9 9 4

2 7.5 15.0 7.0 11.5 5.75 2.5

3 7.0 21.0 6.0 12.5 25/6 1.0

4 6.5 26.0 5.0 13.5 3.375 1.0

5 6.0 30.0 4.0 14.0 2.8 0.5

6 5.5 33.0 3.0 16.0 8/3 2.0

7 5.0 35.0 2.0 20.0 20/7 4.0

8 4.5 36.0 1.0 25.0 3.125 5.0

9 4.0 36 0 32.0 3.56 7.0

10 3.5 35.0 -1 40.0 4 8.0

b) Quantity will the monopolist produce is :


- Monopolists will produce at the quantity that marginal revenue equals marginal cost
 MR = MC at Q* = 6

c) Price will the monopolist charge is :


- The monopolist charge depends on Q*  P = 5.5 at Q* = 6

d) The profit be at this price will be :


- At Q* = 6, P* = 5.5 and ATC* = 8/3
 Profit max = Q*(P* - ATC*) = 6(5.5 – 8/3) = 17
 The profit at this price will be 17$
Problem 2 : A firm has demand function of P=100-Q ($) and total cost function of TC=500+ 4Q+Q^ 2 ($).

a) Is this firm a perfect competitive firm? Why?


- No, this firm is not a perfect competitive
- Because we have TR= P.Q= (100 – Q)Q = 100Q – Q^2
 MR = TR’ = 100 – 2Q
 D: P =100-Q and MR: P = 100-2Q & MR<P => Monopoly not a perfect competitive firm

b) To maximize total revenue :


- TR max  MR = TR’ = 0  100 – 2Q = 0  Q = 50
 P = 100 – Q = 50$
 Maximum total profit is : TR = 100Q – Q^2 = 2500$

c) Price and optimal quantity to maximize profit :


- TC = 500 + 4Q + Q^2 => MC = TC’ = 4 + 2Q
- To maximize profit  MC = MR  4 + 2Q = 100 – 2Q  Q* = 24
 P = 100 – Q = 100 – 24 = 76 => P* = 76$
 Maximum total profit : max = TR* - TC* = 652$

d) Asume government imposes a tax of 8 $ per unit of good sold :


- To maximize profit :
+ Tax => TC + 8Q = 500 + 4Q + Q^2 + 8Q => TC new = 500 + 12Q + Q^2
 MC new = TC new ‘ = 12 + 2Q
 To maximize profit : MC new = MR  12 + 2Q = 100 – 2Q  Q* = 22
 P* = 78$ => max = TR* - TC* = 468

e) Asume government imposes a fixed tax of 100 $ : (do the same like question d)
 Q* = 24, P* = 76$, max = 552$

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