Asked by Ailsa Hansen on Jul 15, 2024
Verified
The demand curve and marginal revenue curve for red rubber balls are given as follows: Q = 16 - P MR = 16 - 2Q
What level of output maximizes profit?
A) 0
B) 4
C) 5.5
D) 6
E) B, C and D all maximize profit.
Marginal Revenue Curve
A graphical representation that shows the change in total revenue for every unit increase in the quantity of output sold.
Demand Curve
A graphical representation showing the relation between the price of a good and the quantity demanded by consumers.
- Grasp the strategies employed by a monopolist to establish the profit-maximizing output and price.
Verified Answer
FK
Farhan KhuwajaJul 17, 2024
Final Answer :
D
Explanation :
To find the level of output that maximizes profit, we need to find the quantity where marginal revenue equals marginal cost. Since we are not given a marginal cost curve, we can assume that marginal cost is constant and equal to $8 (which is half of the intercept of the demand curve).
Setting MR = MC, we get:
16 - 2Q = 8
8 = 2Q
Q = 4
However, we also need to check if this output level is indeed the profit-maximizing level. We can do this by checking the marginal revenue at Q = 4 and Q = 6 (which is the next highest integer value):
MR(Q=4) = 16 - 2(4) = 8
MR(Q=6) = 16 - 2(6) = 4
Since marginal revenue is greater than marginal cost at Q = 4, this is the profit-maximizing level of output. Therefore, the answer is D.
Setting MR = MC, we get:
16 - 2Q = 8
8 = 2Q
Q = 4
However, we also need to check if this output level is indeed the profit-maximizing level. We can do this by checking the marginal revenue at Q = 4 and Q = 6 (which is the next highest integer value):
MR(Q=4) = 16 - 2(4) = 8
MR(Q=6) = 16 - 2(6) = 4
Since marginal revenue is greater than marginal cost at Q = 4, this is the profit-maximizing level of output. Therefore, the answer is D.
Learning Objectives
- Grasp the strategies employed by a monopolist to establish the profit-maximizing output and price.
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