Microeconomic Theory - Competitive Behavior
A monopolistic competitive firm has the following marginal revenue(MR) and marginal cost(MC) function as follows:
MR = 100 - 20Q where Q= quantity of units supplied
MC= 20
The aggregate demand for this firm's product/service is given as:
P = 100 - 10Q where P= price and Q=quantity demanded
Question: What are the level of profits associated with this profit maximizing level of output?
The answer is 160.
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1 solution
Before we can compute the profit, we need to figure out the profit maximizing level of output and price for the firm. Profit is MAXIMIZED when marginal revenue=marginal cost, MR=MC. Therefore, 100-20Q=20 and Q=4. When Q=4, the price sold at the market is 100-10(4)=$60
Now, lets figure out the profit. Profit= TR( total revenue)-TC(total cost) Since MR=100-20Q, TR is just the integral of MR. Therefore, TR= 100Q -10Q 2 Since MC is 20, TC is the integral of MC or TC= 20Q. When Q=4, TR= 400-160=$240 and TC= 20(4)=$80 Profit= 240-80= $ 1 6 0