Written Assignment Unit 4
TR = P.Q
Marginal revenue (MR) is determine by taking the first-order derivative of the TR function.
How you arrived at your results.
The Marginal cost (MC) = $100
Putting MR = MC and solving for Q, we get:
Explanation:
a) How much will the firm produce?
MR = 500 – 20Q
Firm faces no fixed cost. You may wish to arrive at the answers mathematically, or by using a
Given, the demand function as: P = 500 – 10Q
The profit-maximizing condition for a monopolist is MR = MC.
So, Q = 20
TR = 500Q – 10(Q^2)
A monopoly firm faces a demand curve given by the following equation: P = $500 – 10Q, where
Q equals quantity sold per day. Its marginal cost curve is MC = $100 per day. Assume that the
500 20Q = 100
Graph (the graph is not required to be presented), either way, please provide a brief description of
Therefore, the firm will produce 20 units.
b) How much will it charge?
Total variable cost TVC = Average variable cost AVC x Quantity Q = Marginal Cost MC x
A tax of $1000 per day will not in any way affect the firm’s price because a tax of $1,000 per day
Total cost = total variable cost.
And therefore: Total cost TC = MC x Q = 100 x 20 = $2000.
Profit = TR – TC = 6000 – 2000 = $4000.
P = 500 – 10(20) =$300
Plugging the value of Q in the market demand function, we get:
c) Can you determine its profit per day? (Hint: you can; state how much it is.)
Profit = total revenue total cost
Quantity Q.
Total cost = total variable cost + total fixed cost. In this case, the fixed cost is zero and therefore:
Is a fixed cost which the firm must pay every day even if it does not produce anything, as it does
Let’s start by calculating each component alone.
The firm’s profit per day is $4000.
Therefore, the firm will charge $300.
d) Suppose a tax of $1,000 per day is imposed on the firm. How will this affect its price?
Not depend on output produced. Since equilibrium is established by equating Marginal Revenue
Total revenue per day is $6000: Total cost is $2000: Firm profit per day is $4000
Total revenue TR= quantity x price = 20 x 300 = $6000
(MR) with Marginal Cost (MC), and this fixed cost does not impact MC, its price and output will
Remain unchanged.
e) How would the $1,000 per day tax affect its profit per day?
MC = MC + t = 100 + 100 =200
f) How would the $1,000 per day tax its output per day?
P= (15 x 300) – (100 x 15) = 4500 -1500 = $3000
P = 500 – 10(15)
Putting MR =MC, we get:
Plugging the value of Q in the demand function, we get:
Reduction in profit is $(4,500 – 1500) = $3000
P = $350
A tax of $1000 per day does not affect the output of the firm per day because the tax is fixed.
P=TR-TC
Therefore, the tax reduces the quantity sold.
g) Now suppose a tax of $100 per unit is imposed. How will this affect the firm’s price?
With an imposition of tax of $100 per unit, the MC will become:
500 – 20Q = 200
So, Q = 15
Therefore there will be an increase in price for the goods sold.
h) How would a $100 per unit tax affect the firm’s profit maximizing output per day?
Profit = 350*15 200 *15 = $2250
Total marginal output= 1500 / 100 = 15 units
Marginal cost at $100 tax is MC=100=TC=MC x Q = 100 x 15=1500
Therefore, the output reduced to 15 units
Profit maximization occurs where MC=MR
i) How would the $100 per unit tax affect the firms profit per day?
Therefore, marginal revenue = $1500
Profit = TR -TC = (350 x 15) = $5250
Therefore, the profits is reduced to $2,250
