Consider a monopolist with the cost function C(Q) = 10Q and a corresponding marginal cost of...

Question:

Consider a monopolist with the cost function C(Q) = 10Q and a corresponding marginal cost of MC(Q) = 10. The market demand is Q = 40 - 2P, which gives a marginal revenue of MR(Q) = 20 - Q.

a. Write out the firm's inverse demand curve.

b. Draw the (inverse) demand curve, the marginal revenue curve, and the marginal cost curves on a graph.

c. Solve for the monopolist's profit-maximizing level of output and the resulting price, indicating the values on the graph.

d. If this were a competitive market, how much output would the firm produce? What price would the firm charge? Indicate these values on the graph.

Profit Maximization:

It is a condition which occurs when there is a maximum difference between total revenue and total cost. In case of a monopoly, it is achieved when the marginal cost and marginal revenue are same. In case of perfect competition, it is achieved when the price and marginal cost are same.

Answer and Explanation: 1

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a) The inverse demand function is:

{eq}P = 20 - 0.5Q {/eq}

b) The demand curve, marginal revenue curve, and the marginal cost curves are:

c) ...

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Profit Maximization: Definition, Equation & Theory

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Chapter 24 / Lesson 6
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Learn the profit maximization definition, its importance, and explore the profit maximization theory. See how to calculate profit maximization with examples.


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