Question

Target has the monopoly in aordable home furniture in a city. Considering that Target is a prot maximizing monopolist, would it make sense for Target to sell q = 500 units of furniture in this city if the market demand is P = 800 − q? Explain why or why not.

Answer 1

In order to maximize profit a monopolist produces that quantity where MR = MC

where MR = d(TR)/dq = d(P*q)/dq = 800 - 2q, where P = price, q = quantity, TR = Total revenue = P*q and MC = Marginal Cost.

Thus MC = MR => MC = 800 - 2q

Now if he sells 500 units => q = 500

=> MC = 800 - 2q = 800 - 2*500 = -200

=> MC = -200 which is not positive as MC is marginal cost and is positive.

So, This will not make sense to target q = 500 (Note in order to maximize profit a firm sells that quantity where demand is elastic and not inelastic)