Question

As in Worked-Out Problem 17.2 (page 599), Kalamazoo Competition-Free Concrete (KCC) is a local monopolist of ready-mix concrete. Its annual demand function is Qd=16,000−200P, where P is the price, in dollars, of a cubic yard of concrete and Q is the number of cubic yards sold per year. Suppose that Kalamazoo's marginal cost is $20.00 per cubic yard and its avoidable fixed cost is $100,000 per year. Instructions: Round quantities to the nearest whole number and all other answers to 2 decimal places.

a. What is its profit-maximizing sales quantity? units.

b. What would Kalamazoo's profit-maximizing sales quantity be if it had an avoidable fixed cost of $200,000 a year? units

. c. What if that fixed cost were instead sunk?

Q = units ?.

P = $ .?

Please show all work. Step by Step

Answer 1

A) Monopolist Profit Maximizing quantity at where MR=MC

Q=16,000-200p

P=80-Q/200

MR=80-Q/100

MC=20

MR=MC

80-Q/100=20

Q/100=80-20=60

Q=60*100=6000

P=80-6000/200=50

Profit=(50-20)*6000-100,000=180,000-100,000=80,000

B)The profit Maximizing quantity depends on variable cost or marginal cost ,the Marginal cost is same as part a) so Profit Maximizing wilk be same even avoidable fixed cost=200,000

Profit=180,000-200,000=-20,000 .

So firm is making loss that is because of fixed cost .as given fixed cost is avoidable ,so In case if doesn't operate then fixed cost=0 and loss/ profit=0

So operating the production gives 20,000 loss so to minimize the loss the firm will shutdown.

C)The profit Maximizing quantity depends on variable cost or marginal cost ,the Marginal cost is same as part a) so Profit Maximizing will be same even sunk fixed cost=200,000

Profit=-20,000

Because the fixed cost is sunk .

So it can't be recovered ,so if firm doesn't operate ,it loss will be equal to fixed cost =200,000

So to minimize the loss it has to operate in the loss.