Question

A monopolistic seller of rare oriental rugs discovers that 60% of the population is willing to pay $1,000 for a rug. The remaining 40% of the population is willing to pay $2000. Each rug costs $600 to produce. How much should the monopolist charge for each rug?

Answer 1

The monopolist should charge $2000.

Step-by-step explanation:

The cost of producing rug is $600.

Suppose the total population is 100N.

At the price $1000, the profit to seller will be

= TR - TC

=
`\$ 1000\ *\ 100 - \$ 600\ *\ 100`

= $100,000 - $60,000

= $40,000

At the price $2000, the profit to seller will be

= TR - TC

=
`\$ 2000\ *\ 40 - \$ 600\ *\ 40`

= $80,000 - $24,000

= $56,000

The seller will be having higher profit at price $2000, so he should charge $2000 as price of rug.