Question

Bibi Mobile is the only authorized producer in producing smart phone in Country X which is a small country. Its annual revenue is $4,000,000 and the average total cost per smart phone produced is $5,000. The marginal revenue function and the marginal cost functions are as below: Marginal Revenue function: MR = 12,000 - 10Q Marginal Cost function: MC = 2,000 + 15Q where Q represents quantity.

(a) Define the market structure of Bibi Mobile.

(b) State the profit maximization condition. According to this condition based on the given information, calculate the profit maximizing price and quantity of Bibi Mobile? What is the total profit (loss) earned by this company?

(c) Based on the given information and your answers in part (b), illustrate the situation with a diagram and label the critical data related to price, quantity, cost and profit (loss) condition in the diagram. No explanation is needed.

(d) Suppose there is an increase in the minimum wage in Country X and most of the workers are paid on this wage level in Bibi Mobile. Bibi Mobile has recorded a break-even state of profitability afterwards. Illustrate this situation in the same diagram of part (c). Explain.

Answer 1

(a) Bibi Mobile is a monopoly firm. A monopoly market is the one wherein there is a single seller, selling a unique product. Bibi mobile is the sole producer of smart phones in Country X and is therefore acts as a monopoly.

(b) The profit is maximised when marginal revenue is equal to the marginal cost.

MR = 12,000 - 10Q

MC = 2000 + 15Q

MR = MC

12,000 - 10Q = 2000 + 15Q

25Q = 10,000

Q = 400

We know that total revenue is equal to the product of price and quantity

TR = PQ

TR = 4,000,000 (given)

P = TR/Q = 4,000,000/400 = 10,000

Now, we can calculate total cost by using average total cost.

ATC = 5000 (given)

ATC = TC/ Q

TC = ATC(Q) = 5000(400)

TC = 2,000,000

Profit = TR - TC

Profit = 4,000,000 -  2,000,000

Profit = 2,000,000

(c) We now find the inverse demand curve.

TR is the integratio of MR

TR = PQ = (12000 - 5Q)Q

P = 12000 - 5Q (inverse demand function)

Profit is the area below the price and above the average cost curve. Cost is the area under the average cost curve.

 

(d) An increase in wage means that the cost of producing phones has increased since the producer now has to pay higher wages.  

At the break even point, Total revenue = Total cost. This implies Profit = 0

This means that the costs have risen enough to vanish all the profit.

We can therefore say that now P = AVC = 10,000