Question

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion.
Output Total Cost Marginal Cost Quantity Demanded Price Marginal Revenue
0 25 0 0 60 0
1 40 15 1 55 55
2 45 5 2 50 45
3 55 10 3 45 35
4 70 15 4 40 25
5 90 20 5 35 15
6 115 25 6 30 5
7 145 30 7 25 -5
8 180 35 8 20 -15
9 220 40 9 15 -25
10 265 45 10 10 -35

If the firm sells 3 units of output, marginal revenue will be _____.

Answer 1

Profit is maximized when Q = 4 and P = $40, with maximum profit = $90.

Explanation:

(a)  (i) Marginal cost (MC) = Change in Total cost (TC) by Change in output (Q)

(ii) Total revenue (TR) = Price (P) into Q

(iii) Marginal revenue (MR) = Change in TR by Change in Q

(iv) Profit = TR - TC

Therefore:

Q  TC  MC  P  TR  MR  PROFIT

0  25   60  0   -25

1  40  15  55  55  55  15

2  45  5  50  100  45  55

3  55  10  45  135  35  80

4  70  15  40  160  25  90

5  90  20  35  175  15  85

6  115  25  30  180  5  65

7  145  30  25  175  -5  30

8  180  35  20  160  -15  -20

9  220 40  15  135  -25  -85

10  265 45  10  100  -35  -165

When Q = 4, MR = $25 and MC = $15, so MR > MC. When Q = 5, MR = $15 and MC = $20, so MR < MC. Therefore,  

Profit is maximized when Q = 4 and P = $40, with maximum profit = $90.

(b)  In the long run, new firms will enter the market by being attracted by positive short run profit. Therefore in long run, demand for individual firm will decrease, price for individual firm will decrease and profit will decrease until each existing firm earns zero economic profit.