A firm has discovered a new kind of nonfattening, non-habit-forming dessert called zwiffle. It doesn't taste very good, but some people like it and it can be produced from old newspapers at zero marginal cost. Before any zwiffle could be produced, the firm would have to spend a fixed cost of $F. Demand for zwiffle is given by the equation q = 12 - p. The firm has a patent on zwiffle, so it can have a monopoly in this market.

Question

Quizplus · Accepted Answer

The firm will produce zwiffle if the profit is non-negative. The maximum revenue is when marginal revenue equals marginal cost (which is zero here). Solving for p in the demand equation q = 12 - p gives p = 12 - q. Total revenue TR = p*q = (12-q)q = 12q - q^2. Marginal revenue MR = d(TR)/dq = 12 - 2q. Setting MR = 0 gives q = 6. At q = 6, p = 6, so revenue is 36. The firm will produce if F ≤ 36.

A Firm Has Discovered a New Kind of Nonfattening, Non-Habit-Forming