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A monopoly firm faces a demand curve of P = $500 - 10Q and marginal costs of $100 per unit. It produces 20 units per day and charges $300 per unit, earning $4000 in daily profits. A $1000 per day tax would not affect price or output but would reduce profits to $3000. A $100 per unit tax would increase price to $350 and reduce output to 15 units, lowering profits to $2250 per day.

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Shiraz Shafqat
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951 views5 pages

Written Assignment Week 4

A monopoly firm faces a demand curve of P = $500 - 10Q and marginal costs of $100 per unit. It produces 20 units per day and charges $300 per unit, earning $4000 in daily profits. A $1000 per day tax would not affect price or output but would reduce profits to $3000. A $100 per unit tax would increase price to $350 and reduce output to 15 units, lowering profits to $2250 per day.

Uploaded by

Shiraz Shafqat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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A monopoly firm faces a demand curve given by the following equation: P = $500 − 10Q, where Q equals

quantity sold per day. Its marginal cost curve is MC = $100 per unit. Assume that the firm faces no fixed

cost. You may wish to arrive at the answers mathematically, or by using a graph (the graph is not

required to be presented), either way, please provide a brief description of how you arrived at your

results.

a)    How much will the firm produce?

Given:

The demand function: P = 500 - 10Q

The Marginal cost (MC) = $100

The profit-maximizing condition for a monopolist: MR = MC.

Total Revenue = P x Q

Total Revenue = 500Q - 10(Q x 2)

Marginal Revenue = 1st order derivative of TR function, hence:

MR = 500 - 20Q

Plugging in the values for MR = MC and solving for Q, we get:

500 - 20Q = 100

So, Q = 20

The firm will produce 20 units.

b)    How much will it charge?

Substituting the value of Q in the market demand function:

P = 500 - 10(20) =$300

The firm will charge $300 per unit.


c)    Can you determine its profit per day? (Hint: you can; state how much it is.)

Yes, we can determine its profit per day with the following:

Profit = total revenue – total cost

Total revenue (TR) = quantity x price = 20 x 300 = $6000

Total cost (TC) = Total Variable Cost + Total Fixed Cost. Since the fixed cost is 0:

Total Cost = Total Variable Cost.

Total Variable Cost (TVC) = Average Variable Cost (AVC) x Quantity (Q) = Marginal Cost (MC) x Quantity

(Q).

Total Cost:

TC = MC x Q = 100 x 20 = $2000.

Profit:

TR – TC = 6000 – 2000 = $4000.

Total Revenue / Day: $6000

Total Cost: $2000

Firm Profit / Day: $4000

d)    Suppose a tax of $1,000 per day is imposed on the firm. How will this affect its price?

A tax of $1,000 per day will not affect the price of the company because it is a fixed cost that the firm

must pay every day, even if it doesn't produce anything. This means that even if the firm doesn't

produce anything, its price and output will not change. This concept of equilibrium which refers to the

difference between the cost of production and the cost of goods and services is known as the marginal

cost.
e)    How would the $1,000 per day tax its output per day?

Since the tax is fixed, it does not change the output per day.

f)    How would the $1,000 per day tax affect its profit per day?

Profit = TR - TC

P = (15 x 300) - (100 x 15) = 4500 -1500 = $3000

Profit per day will be reduced by: $(4,500 - 1500) = $3000 / Day

g)    Now suppose a tax of $100 per unit is imposed. How will this affect the firm’s price?

If a tax of $100 per unit is imposed on the firm, this will change its Marginal Cost. The change is as

follows:

MC = MC + Tax (T) = 100 + 100 =200

Substituting MR for MC, we get:

500 - 20Q = 200

Q = 15 (Showing a reduction in production from 20 units)

Tax imposition will lower overall production.

Now, substitute value of Q in our demand function:

P = 500 - 10(15)

P = $350

The price for goods sold has increased by $50 to $350.


h)    How would a $100 per unit tax affect the firm’s profit maximizing output per day?

Profit maximization happens when MC intersects (or equals) MR

Marginal Cost at $100 tax is as follows:

MC = 100 =TC = MC x Q = 100 x 15 = 1500

Marginal Revenue = $1500

Total Marginal Output (TMO) = 1500 / 100 = 15 units

The output has been reduced to 15 units.

I)    How would the $100 per unit tax affect the firms profit per day?

Profit = TR -TC = (350 x 15) = $5250

Profit = (350 x 15) – (200 x 15) = $5250 - $3000 = $2250

This shows a profit reduction of $3,000 per day, bringing the daily profit to $2250
Rittenberg, L. & Tregarthen, T. (2009). Principles of Economics. Flat World Knowledge.

https://open.lib.umn.edu/principleseconomics/front-matter/publisher-information/

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