Group Assignment Presentation 8
Problem 1: The following table shows the demand & cost data for a monopolist:
a. Complete the table:
Quantity Price ($) Total Marginal Total cost Average Marginal
revenue revenue ($) total cost cost ($)
($) ($) ($)
0 8.5 0 _ 5 _ _
1 8.0 8 8 9 9 4
2 7.5 15 7 11.5 5.75 2.5
3 7.0 21 6 12.5 4.17 1
4 6.5 26 5 13.5 3.38 1
5 6.0 30 4 14 2.8 0.5
6 5.5 33 3 16 2.67 2
7 5.0 35 2 20 2.86 4
8 4.5 36 1 25 3.15 5
9 4.0 36 0 32 3.56 7
10 3.5 35 -1 40 4 8
b. What quantity will the monopolist produce?
The monopolist will produce the quantity at which they can maximize profit.
-> MR = MC
-> Q* = 6
c. What price will the monopolist charge?
The monopolist will charge at point Q* = 6
-> P = 5.5 ($)
d. What will the profit be at this price?
At Q* = 6; P*= 5,5; ATC* = 2,67
-> Pmax = Q* x (P* - ATC*)
= 6 x (5,5 - 2,67)
= 17
So the profit at this price will be $17
Problem 2: A firm has demand function of P=100-Q ($) and total cost function of
TC=500+ 4Q+Q2 ($).
a. Is this firm a perfect competitive firm? Why?
We have:
TR = P x Q = (100 - Q) x Q
-> TR = 100Q - Q^2
-> MR = TR’ = 100 - 2Q
-> MR < P
So this firm is monopoly, not a perfect competitive firm
b. What is price and quantity to maximize total revenue ? What is that maximum total
revenue ?
We have:
Total revenue:
TR = P x Q = 100Q - Q^2
TR’ = 0 -> 100 - 2Q = 0 -> Q = 50
Price:
P = 100 - Q = 100 - 50 = 50 dollars
-> Therefore, maximum total revenue: 2500 dollars
c. What is price and optimal quantity to maximize profit? What is that maximum total
profit ?
● To maximize profit, we have:
MR=MC
⇔(TR)’=(TC)’
⇔(P.Q)’=(TC)’
⇔(100.Q-Q^2)’=(500+4Q+Q^2)’
⇔100-2Q=2Q+4
⇔ Q*=24
So the optimal quantity to maximize profit is: Q*=24
● P=100-Q => P*=100-24=76$
So the price to maximize profit is P*=76$
● The maximum total profit is:
d. Asume government imposes a tax of 8 $ per unit of good sold, what is price and
optimal quantity that gives the firm maximum profit? What is this maximum profit?
With a tax of $8 per unit, the firm's marginal cost will increase by $8 for each unit sold.
New Marginal Cost (MC) becomes:
MC = 4 + 2Q + 8 = 12 + 2Q
To maximize profit with the new marginal cost, set MR=MC:
100−2Q=12+2Q
88=4Q
Q=22
Substitute Q=22 into the demand function to find the price:
P = 100 - Q = 100 - 22 = 78
Calculate total revenue (TR) and total cost (TC) with the tax included:
○ Total Revenue: TR=P×Q=78×22=1716
○ Total Cost (TC) with tax:
TC=500+4(22)+(22)2+8×22=500+88+484+176=1248
Profit is TR−TC:
Profit=1716−1248=468
So, with a per-unit tax of $8, the optimal price and quantity are $78 and 22 units,
respectively, and the maximum profit is $468.
e. Asume government imposes a fixed tax of 100 $, what is price and optimal quantity
that gives the firm maximum profit?
We have:
Total cost:
TC = 500 + 4Q + Q^2 + 100 = 600 + 4Q + Q^2
Marginal cost:
MC = TC’ = 600 + 4Q + Q^2 = 4 + 2Q
Price and optimal quantity that gives the firm maximum profit:
MC = MR -> 4 + 2Q = 100 - 2Q
-> Q = 24
-> P = 100 - Q = 76 dollars
