Question

Moving to a small town, you get a job as a business analyst for ABC Coffee, which happens to operate the only caf6 in town. The demand for ABC's coffee is given as: Q : 100 - P, where P is the price (in cents) charged by ABC for a cup of coffee and Q is the quantity sold per day (i.e., cups per day). Furthermore, suppose total fixed cost encountered by ABC is zero, and marginal cost (MC) equals average variable cost (AVC), with both constant at 20 cents (i.e., MC : AVC :20 at all output levels). Lastly, given the demand for ABC's coffee, its marginal revenue is given by the following equation: MR : 100 - 2Q.

t1l Interested in maximizing ABC's profit, you should recommend that ABC sell _ cups of coffee per day.

A. 200

B. 80

C. 60

D. 40

Answer 1

Given that,

ABC Coffee is the only cafe in the town. Therefore, it is a monopoly.

Demand, Q = 100 - P, P in cents

Marginal Revenue = 100-2Q

Marginal Cost = Average Variable Cost = 20 cents

For a monopoly firm, the profit is maximized when its Marginal Revenue = Marginal Cost

i.e., 100 - 2Q = 20

2Q = 100 - 20

Q = 80/2 = 40

Therefore, to maximize it's project ABC Coffee should sell 40 cups of coffee per day