Question

Moving to a small town, you get a job as a business analyst for ABC Coffee, which happens to operate the only caffe 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

l2l Interested in maximizing ABC's profit, you should recommend thatABC price its coffee at_cents per cup.

A. 20

B. 40

c. 60

D. 100

Answer 1

In order to maximize profit a firm produce sthat quantity at which MR = MC

where MR = Marginal revenue = 100 - 2Q and MC = Marginal cost = 20.

Thus MR = MC => 100 - 2Q = 20 => Q = 80/2 = 40.

From demand curve we have Q = 100 - P => P = 100 - Q => P = 100 - 40 = 60.

Thus profit maximizing price = 60 cents

Thus in order to maximize profit this firm should charge 60 cents.

Hence the correct answer is (c) 60