Question

A firm has hired you as a consultant. Their only concern is to maximize profits. This firm is not in a perfectly competitive industry--they have some control over price. They give you the following information: We're selling 50 units at a price of $50 and at the end of the day we're currently earning revenues of $2500. Our costs are $2600. It costs us about $50 to produce another unit. Based on your analysis, what would you advise them to do?

Answer 1

Increase Price, Decrease Quantity

Step-by-step explanation:

given data

selling = 50 units

price = $50

currently earning revenues = $2500

costs = $2600

costs = $50

solution

In the given case, the firm is earning losses.

so here net loss = revenue - cost .....................1

net loss = $50 × 50 - $2600

net loss = ($2500-$2600)

net loss -$100

and

If the firm is existing in a competitive market

it will charge P = MC = $50

so here earning revenue of $50 × 50 = $2500.

net profit = revenue - cost = $2500 - $2000

net profit = $500

• Based on the information given to the company at the current level of production, price = marginal cost = $ 50. Since the company is not a fully competitive industry and the company has the power to control the price level, it is a company monopoly.
• The maximum condensing gain for a monopoly is greater than MR = MC and the cost is MC. The price of a monopoly is higher than the competitive price and the quantity is less than the competitive price. So the company has to reduce the size and increase the price level