Question

A business faces the following average revenue (demand) curve: P = 10 − 0.05Q where Q is weekly production and P is price, measured in dollars per unit. Its marginal revenue curve is MR = 10 − 0.1Q. Its cost function is given by C = 6Q. Assume that the business maximizes profits. What is the level of production, price, and total profit per week?

Answer 1

Ans. Average revenue, P = 10 - 0.05Q

Marginal Revenue, MR = 10 - 0.1Q

Cost function, C = 6Q

=> Marginal Cost, MC = dC/dQ = 6

and Average cost, AC = C/Q = 6

At profit maximizing level,

MR = MC

=> 10 - 0.1Q = 6

=> Q = 40 units

Substituting this in average revenue function, we get,

P = 10 - 0.05*40 = $8

ans Profit = (P - AC)*Q = (8-6)*40 = $80

Thus, at profit maximizing level, output is 40 units, price is $8 and profit is $80.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.