Question

A single firm monopolizes the entire market for shoelaces and can produce at constant average and marginal costs of $10. The firm faces a market demand curve given by

Q_D = 60 - P

Calculate the firms profits

Answer 1

Answer : Given,

The demand function is,

Q = 60 - P

=> P = 60 - Q

TR (Total Revenue) = P*Q = (60 - Q) * Q = 60Q - Q^2

MR (Marginal Revenue) = TR / Q = 60 - 2Q

MC (Marginal Cost) = $10 (Given).

For monopolist the profit maximizing condition is MR = MC. So,

60 - 2Q = 10

=> 60 - 10 = 2Q

=> 50 = 2Q

=> Q = 50 / 2

=> Q = 25

From demand function we get,

P = 60 - Q = 60 - 25

=> P = $35

TR = P*Q = 35 * 25 = $875.

TC (Total Cost) = Average cost * Q = 10 * 25 = $250.

Profit = TR - TC = 875 - 250 = $625.

Therefore, here the firm's profit is $625.