Always Round Tire is the only producer of tires for the new British import, the Maxi Copper. Demand for a set of four tires is P = 800 - 5Q while the costs to Always Round are: MC = 15Q. What would be the monopoly price and quantity? What would happen to price and quantity if the market were perfectly competitive (assuming the same costs)?

Question

Quizplus · Accepted Answer

The Answer is A monopoly would maximize its profits by equating marginal revenue and marginal cost. For this linear demand curve MR=800-10Q. Setting MR=800-10Q=15Q=MC, we can solve for Q. Q=800/25=32. The price, P=800-5Q=800-160=640 for a set of four tires. If this was a perfectly competitive market then price would equal marginal cost 800-5Q=15Q so 20Q=800 or Q=40, and P=15.

Always Round Tire Is the Only Producer of Tires for the New