Question

Q1/ a. For the following three cases, calculate

i. The marginal revenue curve

ii. The level of output where MR = MC (i.e., set the equation from item i equal to marginal cost and solve for Q)

iii. The profit-maximizing price (i.e., plug your answer from equation ii into the demand curve)

iv. Total revenue and total cost at this level of output (something you learned in Chapter 11)

v. What entrepreneurs really care about—total profit

Case A: Demand: P = 40 − Q Fixed cost = 100 Marginal cost = 10

Case B: Demand: P = 100 − 2Q Fixed cost = 100 Marginal cost = 10

Case C: Demand: P = 100 − 2Q Fixed cost = 100 Marginal cost = 20.

b. What is the markup in each case? Measure it two ways: first in dollars, as price minus marginal cost, and then as a percentage markup [100 × (P – MC)/MC, reported as a percent].

c. If you solved part b correctly, you found that when costs rose from Case B to Case C, the monopolist’s optimal price increased. Why didn’t the monopolist charge that same higher price when costs were lower? After all, they are a monopolist, so they can charge what price they want. Explain in language that your grandmother could understand.

Answer 1