Question

Consider the special case of a monopoly in which MC = 0. Let's find the firm's best choice when more goods can be produced at no extra cost. A great deal of e-commerce is close to this model, where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters. Consider a monopoly facing the following demand curve and fixed costs: P = 120 – 12Q; Fixed costs = 1,000 Should the firm go into business? If so, how much should the firm produce?

Answer 1

Answer: No, because of loss.

Step-by-step explanation:

Given that it is a case of monopoly where, MC = 0

Demand curve: P = 120 - 12Q

Fixed Cost (FC) = 1,000

profit maximizing condition for a monopolist, MR = MC

Total Revenue(TR) = PQ = 120Q - 12Q²

Marginal Revenue(MR) =
`(dTR)/(dQ)`

= 120 - 24Q

Now, MR = MC

120 - 24Q = 0

Q = 5 units

P = 120 - 12 × 5 = $60

Profit/ Loss = TR - FC [ ∴ TR = 300]

= 300 - 1000

= -700

So, there is loss incurred if the firm go into the business.