Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack and a fixed cost of $50 million.

-Refer to the scenario above.If Tobac Co.is forced by the government to charge the fair-return price,the firm's profit would be ________.

Question

Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack and a fixed cost of $50 million.
 
-Refer to the scenario above.If Tobac Co.is forced by the government to charge the fair-return price,the firm's profit would be ________.

Quizplus · Accepted Answer

The fair-return price would force the firm to charge a price equal to its average cost, which is $2.00 per pack. At this price, the firm would sell 200 million packs of cigarettes, generating $400 million in total revenue. Subtracting the total cost of $250 million ($50 million fixed cost plus $2.00 variable cost per pack times 200 million packs) from total revenue yields a profit of $150 million. This is exactly a fair return on the firm's investment, so the profit would be $0.