A firm with market power faces the demand function q = 2,000 - 20P. The firm's total cost function is TC(q) = 20q + 0.02q² + 2,000. In this market, the output level that maximizes total surplus is ____ units. A) 777.78 B) 888.89 C) 921.91 D) 940.63

Question

Quizplus · Accepted Answer

To maximize total surplus, set marginal cost (MC) equal to marginal benefit (MB), which is the demand curve. The inverse demand function is P = 100 - 0.05q. The MC is derived from TC, MC = 20 + 0.04q. Setting MC = MB: 20 + 0.04q = 100 - 0.05q, solving gives q = 888.89.

A Firm with Market Power Faces the Demand Function Q