Question

1. A firm charges $20 for the first unit of a good purchased, and $15 for...

1. A firm charges $20 for the first unit of a good purchased, and $15 for each additional unit purchased in excess of one unit. The firm's marginal cost and average total cost are both constant at $12. A consumer purchases six units. How much profit will the firm earn?

a. $12

b. $16

c. $20

d. $23

2. A representative consumer's demand function for shirts is: P = 20-2Q. The firm's marginal cost of production is constant at $4. What is the optimal number of shirts for the firm to sell in a package, and what price should it charge for the package?

a. 2 shirts, $12

b. 4 shirts, $16

c. 6 shirts, $60

d. 8 shirts, $96

Please show step-by-step on how you got the answer! :)

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Homework Answers

Answer #1

1. Profit of firm

= TR - TC

TR calculation

- For first unit price is 20 = $20 for 1 unit

- Then after for 5 units will be charged 15 = 15* 5 = $75 for last 5 unit

- TR = 20 + 75 = $95

TC calculation

- 12 is ATC, TC = ATC*Q = 12*6 = $72

Profit = TR - TC = 95 -72 = $23 is profit

2. Price and quantity

Profit Maximizing quantity is MR = MC

P = 20-2Q

TR = P*Q

TR = 20Q - 2Q^2

MR = 20 - 4Q

MR = MC for profit maximizing quantity

20 - 4Q = 4

4Q = 16

Q = 4 units

Here MR = P

Thus total price will be for this package P*Q = 4 * 4 = $16

Thus price is $16 and Q is 4 shirts

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