Question

Imagine a monopoly producer in the computer industry called Megasoft. The market demand for computer products and the total cost at each level of output is given below. Fixed costs equal $140,000. Fill in the rest of the table and answer the following questions:

Quantity (computers)	Price	Fixed Costs	Total Cost	Marginal Cost	Total Revenue	Marginal Revenue	Average Cost
100	$2,000	$14,000	$143,000		$200,000	$2,000	$1,430
200	$1,900	$14,000	$150,000	70	$380,000	$3,800	$750
300	$1,800	$14,000	$170,000	200	$540,000	$5,400	$567
400	$1,700	$14,000	$220,000	500	$680,000	$6,800	$550
500	$1,600	$14,000	$340,000	1200	$800,000	$8,000	$680
600	$1,500	$14,000	$550,000	2100	$900,000	$9,000	$917
700	$1,400	$14,000	$900,000	3500	$980,000	$9,800	$1,286

1. Is Megasoft a perfectly competitive firm? How can you tell?

2. What is the profit maximizing level of output for Megasoft? How can you tell?

3. How does Megasoft decide what price to charge?

4. What are the firm’s profits?

 

Answer 1

Given data:

Fixed costs equal $140,000.

Quantity (computers)	Price	Fixed costs	Total cost	Marginal cost	Total revenue	Marginal revenue
100	$2000	$14000	$143000	80	$200000	$2000
200	$1900	$14000	$150000	70	$380000	$3800
300	$1800	$14000	$170000	200	$540000	$5400
400	$1700	$14000	$220000	500	$680000	$6800
500	$1600	$14000	$340000	1200	$800000	$8000
600	$1500	$14000	$550000	2100	$900000	$9000
700	$1400	$14000	$900000	3500	$980000	$9800

(a) Mega soft a perfectly competitive firm:

All firms sell an identical product (the product is a "commodity" or "homogeneous").

All firms are price takers (they cannot influence the market price of their product).

Market share has no influence on prices.

· No, mega soft is not a perfectly competitive firm as it is earning a positive profit at a point where marginal revenue is equal to marginal cost.

(b) profit maximizing level of output for Mega soft:

The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. As the price falls, the market's demand for output increases.

· The profit maximizing level of output is 500 as at this level MR = MC.

(c) Mega soft decide what price to charge:

Mega soft first decides the quantity where MR = MC and then charges the price MR = MC and in our case its $1600

(d) firm’s profits:

When price is greater than average total cost, the firm is making a profit. When price is less than average total cost, the firm is making a loss in the market.

Perfect Competition in the Short Run:

In the short run, it is possible for an individual firm to make an economic profit.

Firm profit = TR –TC = $800000 - $340000 = $460000