Bus 640 Week 4 Assignment 2

MARKET STRUCTURES 3 P = 200 – Q/25 P= 200 – (1500/25) P = 200 – 60 P = 140 Profit maximizing price is $140 at an output level of 1,500 units. These rates are the point in which Robert’s New Way Vacuum Cleaner can expect to see their demand curve start its downward slope as the firm lowers their product-selling price. Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point. Price 200 D = 200 – 0.04Q MC = 20 + 0.04Q $140 MR = 200 – 0.08Q 20 1500 2500 5000 Quantity b. How much economic profit do you expect that Robert’s company will make in the first year? Economic Profit = TR – TC TR = 200Q – 0.04Q^2 TR=200(1500) -0.04(1500^2) TR= 300,000 – 90,000 TR= 300,000 – 90,000 = 210,000 TR= $210,000 TC = 1500 + 20Q + 0.02Q^2 TC= 1500 + 20(1500) + 0.02(1500^2) TC= 1500 + 30000 + 45,000 TC= 1500 + 30000 + 45,000 = 76500 TC = $76,500 Profit = TR – TC Profit = 210,000 – 76,500 Profit = $133,500

2 Market Structures and Pricing Decisions Applied Problems Robert has a freshly underway company called New Way Vacuum Cleaner Company, which belongs to a monopolistically competitive market. It has a demand curve for the product that is conveyed as “Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2” (Douglas, 2012). A. “What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point” (Douglas, 2012)? Demand Q=5000-25P Total revenue = P*Q =P*(5000-25P) TR= 5000P-25P2 MR= 5000-50P TC= 1500+20Q+0.02Q2 MC= 20+0.04Q Profit maximization; MR=MC 5000-50P= 20+0.04Q 5000-50P= (20+0.04(5000-25P) 5000-50P= 20+200-P 4780=49P P= 97.55

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