Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve

-Refer to the scenario above. When Tobac Co.'s profit is maximized, each pack of cigarette is sold for________.
A) $5.00
B) $4.00
C) $3.00
D) $2.00

Question

Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve
 
-Refer to the scenario above. When Tobac Co.'s profit is maximized, each pack of cigarette is sold for________.
A) $5.00 
B) $4.00 
C) $3.00 
D) $2.00

Quizplus · Accepted Answer

The profit-maximizing price is typically where marginal cost equals marginal revenue. Without additional data, we assume the scenario indicates $5.00 as the price where profit is maximized.

Tobac Co Is a Monopolist in Cigarette Market in Nicotiana Republic