Question

Suppose you are the marketing manager for Fruit of the Loom. An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 − 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q) = 1 + 4Q (in cents), compute the profit Fruit of the Loom will earn by charging the optimal block price.

a. $108.50

b. $0.73

c. $1.37

d. $136.50

Answer 1

Correct option is b. $0.73

When a firm charges optimal block price, it produces at a point where P=MC.

Given, C(Q)=1+4Q (in cents)

By differentiating C(Q) with respect to Q, we can calculate MC.

MC=4

It is also, given that P=25-3Q (in cents).

Now, we will equate price and marginal cost,

25-3Q=4

Q=21/3=7.

Now, we can calculate the profit that Fruit of the Loom will earn by charging the optimal block price as follows:

We know that the profit by charging the optimal block price equals the consumer surplus.

Profit=0.5(y intercept of the demand curve-marginal cost) X quantity

Profit=0.5(25-4) X 7=10.5 X 7=73.5 cents=$0.73