Table 15-18
Tommy's Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy's is able to engage in perfect price discrimination.

-Refer to Table 15-18.If the monopolist can engage in perfect price discrimination,what is the quantity that maximizes economic profit?
A) 5 ties
B) 6 ties
C) 7 ties
D) 8 ties

Question

Table 15-18
Tommy's Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy's is able to engage in perfect price discrimination.
 
-Refer to Table 15-18.If the monopolist can engage in perfect price discrimination,what is the quantity that maximizes economic profit?
A) 5 ties 
B) 6 ties 
C) 7 ties 
D) 8 ties

Quizplus · Accepted Answer

Under perfect price discrimination, a monopolist charges each customer their maximum willingness to pay, which is equal to the demand curve. From the table, we can see that the demand for each tie is:
P = 60 - 5Q
To find the monopolist's profit-maximizing quantity, we need to find where marginal revenue equals marginal cost. The marginal revenue from selling an additional tie is:
MR = ∆TR/∆Q = P + Q(∆P/∆Q) = 60 - 10Q
The marginal cost is given as MC = 5. So we equate MR and MC to get:
60 - 10Q = 5
Q = 7 ties
At this quantity, the monopolist charges a price of P = 60 - 5(7) = $25 per tie, which is the maximum willingness to pay for the 7th tie. The monopolist's economic profit is:
TR - TC = (25)(7) - (5)(7) = $140. 
Therefore, the monopolist should produce and sell 7 ties to maximize economic profit.

Table 15-18 Tommy's Tie Company, a Monopolist, Has the Following Cost and Cost