A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. What is the firm's maximum economic profit?

Question

Quizplus · Accepted Answer

The firm's marginal revenue is equal to the price minus the marginal cost, which is $10 per book. The firm's profit-maximizing output is where marginal revenue equals marginal cost, which is at a price of $50 and a quantity of 40 books. The firm's total revenue is $2,000, and its total cost is $2,400, so its economic profit is -$400.

A Textbook Publisher Is in Monopolistic Competition