Question

2. You have been hired to do some consulting for Fishy Joe’s, a profit-maximizing monopolistic competitor selling “popplers”. You have estimated the firm’s demand, marginal revenue, and marginal cost curves to be, respectively, P = 100 − 2Q, MR = 100 − 4Q, and MC = 20 + Q, where quantity Q is measured in servings and prices are measured in dollars per serving. Currently, the firm is producing where

• Price = $50/serving

• Average Total Cost = $38/serving

(a) Is the firm currently maximizing profits? If not, what should it do to maximize profits?

(b) Based on your answer to the above question, all else equal, in the long-run will the firm i. produce more output, less output, or the same level of output? ii. earn higher or lower profits?

Answer 1