Question
In: Economics
The monopolist: "You Can't Handle the Ruth" sells baseball cards. It has a fixed cost of...
The monopolist: "You Can't Handle the Ruth" sells baseball cards. It has a fixed cost of $5000 in rent, and a variable cost of
2Q. Q is t he number of baseball cars which are sold. The firm faces a market demand curve of P=200-Q.
What is the firms profits maximizing equilibrium?
How much profits is the firm making?
Should it stay open or shut down?
Solutions
Expert Solution
Demand Function
P = 200 - Q
Profit is maximized where marginal revenue and marginal cost both are equal
Marginal revenue can be calculated from the demand curve by doubling the coefficient of Q
MR = 200 - 2Q
Total Cost Function
TC = 5000 + 2Q
Marginal cost can be calculated from the total cost function by differentiation.
MC = dTC / dQ
MC = 2
Equating MR and MC
200 - 2Q = 2
Q = 99
Hence the equilibrium quantity is 99 units
To find the equilibrium price we will use this quantity in demand function.
P = 200 - Q
P = 200 - (99)
P = 101
Profit = Total Revenue - Total Cost
Total Revenue = Price x Quantity
Total Revenue = 101 x 99
Total Revenue = 9999
Total Cost = 5000 + 2Q
Total Cost = 5000 + 2(99)
Total Cost = 5198
Profit = Total Revenue - Total Cost
Profit = 9999 - 5198
Profit = 4801
A firm should shut down when it is not able to cover its average variable cost from price so at 99 units price is $101 and
AVC = VC / Q
AVC = 2Q / Q
AVC = 2(99) / 99
AVC = 2
As price is greater than AVC hence the should continue to produce and should not shut down.
Rahul Sunny answered 1 year agoRelated Solutions
he monopolist: "You Can't Handle the Ruth" sells baseball cards. It has a fixed cost of...
he monopolist: "You Can't Handle the Ruth" sells baseball
cards. It has a fixed cost of $5000 in rent, and a variable cost of
2?. Q is t he number of baseball cars wehich are sold. The firm
faces a market demand curve of P=200-Q.
What is the firms profits maximizing equilibrium?
How much profits is the firm making?
Should it stay open or shut down?
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