A monopolistically competitive firm faces demand given by this equation: P = 50 - Q. It has no fixed costs and its marginal cost is $20 per unit. What is the value of the firm's monopoly profits when it sets a price that maximizes its monopoly profits?
A) $125
B) $300
C) $425
D) $225

Question

Quizplus · Accepted Answer

To maximize profits, the firm sets marginal revenue (MR) equal to marginal cost (MC). The demand equation is P = 50 - Q, so total revenue (TR) is P*Q = (50 - Q)Q = 50Q - Q^2. The marginal revenue (MR) is the derivative of TR, which is 50 - 2Q. Setting MR = MC gives 50 - 2Q = 20, solving for Q gives Q = 15. The price is P = 50 - 15 = 35. Profit is (P - MC) * Q = (35 - 20) * 15 = $225.

A Monopolistically Competitive Firm Faces Demand Given by This Equation