Miyuru Abeykoon Jayasundara Mudiyanselage - 640610

Question 03

Cost function is given as C(Q) = 125 + 4Q2

Determine the profit-maximizing output and price, profit and discuss economic
implications, if
[1] You are a price taker and other firms charge $40 per unit;
[2] You are a monopolist and the inverse demand for your product is P=100 - Q.
[3] You are a monopolistically competitive firm and the inverse demand for your brand
is P = 100 - Q

Make sure to show your work.

Answer

[1]. Revenue Function R ( Q )=P∗Q=40 Q

2
Cost FunctionC ( Q )=125+ 4 Q
Profit Function π ( Q ) =R (Q )−C (Q)
2
¿ 40 Q−125−4 Q 1
dπ
Profit Maximizing Output = =40−8 Q
dQ
Therefore Profit Maximizing Output =Q=5
Maximum Profit=40∗5−125−4∗5^2
¿ $-25

This means that the firm is incurring losses the current market conditions are not favourable for the
firm at the given production level and market price. Not viable in long run. As suggestions; restructure
costs and take steps to improve efficiency of the overall business.

[2] .
2
Revenue Function R ( Q )=P∗Q=Q∗( 100−Q )=100 Q−Q
2
Cost FunctionC ( Q )=125+ 4 Q
Profit Function π ( Q ) =R (Q )−C (Q)
2 2
¿ 100 Q−Q −125−4 Q
dπ
Profit Maximizing Output= =100−10 Q ----------------1
dQ
 Therefore Profit Maximizing Output =Q=10
Substituting in 1, Optimal Price = $90

Maximum Profit=90∗10−(125+ 400)

¿ $375

P=$90 means a higher market power since the it is greater than marginal cost. As a monopolist it has
the ability to set prices higher than in a competitive market, which result in higher profits.

[3] . All the calculations same as above.

2
Revenue Function R ( Q )=P∗Q=Q∗( 100−Q )=100 Q−Q
2
Cost FunctionC ( Q )=125+ 4 Q
Profit Function π ( Q ) =R (Q )−C (Q)
2 2
¿ 100 Q−Q −125−4 Q
dπ
Profit Maximizing Output= =100−10 Q ----------------1
dQ
Therefore Profit Maximizing Output =Q=10
Substituting in 1, Optimal Price = $90

Maximum Profit=90∗10−(125+ 400)

¿ $375