Question

The XAFI company monopolizes the production and distribution of the N95AB mask in Indonesia. The production of this mask itself incurs a marginal cost of $2 per unit and zero fixed cost. The company itself faces an inverse demand function of P = 14 – Q.

1. What would be XAFI monopoly price in equilibrium?  
2. How many N95 AB masks XAFI should produce?
3. What would be XAFI profit in equilibrium?
4. What happens to the price and the quantity of N95AB mask produce, if the fixed cost for XAFI rise to $10?

Answer 1

Because the demand function is P = 14 - Q the marginal revenue function will have the same intercept of 14 but twice the slope. Hence, MR = 14 - 2Q.

Profit maximizing level of output has MR = MC

14 - 2Q = 2

Q = 12/2 = 6

P = 14 - 6 = $8

Profit = revenue- cost = 6*8 - 6*2 = $36

When there is zero fixed cost, the Monopoly price at the equilibrium will be $8 per mask, quantity will be 6 masks and profit will be $36

When the fixed the cost is increased, there will be no change in profit maximizing level of output and price but the profit will change to $36 - $10 = $26.