A music studio faces the following demand schedule when releasing the next Compa
ID: 1109934 • Letter: A
Question
A music studio faces the following demand schedule when releasing the next Compact Disc by U2. The studio must pay U2 $10 million to make the CD, and the marginal cost of printing the CD is always $3 per disc. P is price, in dollars; Q is quantity demanded, listed in millions of CDs. Calculate total revenue, marginal revenue, fixed cost, marginal cost, variable cost, total cost, and profit for each quantity listed (if a column is in millions, please label it accordingly).
Price Q TR MR FC MC VC TC Profit
18 0 - -
17 1
16 2
15 3
14 4
13 5
12 6
11 7
10 8
9 9
8 10
What price and quantity would a profit-maximizing music studio choose? What profit will the studio make?
Show this problem graphically by graphing the Demand curve, MR, and MC, labeling everything relevant, including the equilibrium price and quantity. Show Consumer and Producer Surplus. Also show the deadweight loss of monopoly. How much would the firm produce if it was owned by the government and trying to maximize economic efficiency (make total surplus as big as possible)?
Assume this demand curve is representative of demand for any U2 CD. What is the most money they could ask for in order to make their next CD that would still allow the firm to produce the CD? (Please answer the following hints: how do fixed costs affect the firm’s decisions on price and quantity? What is the minimum amount of economic profit a firm needs to still make the product? Therefore, how much money could U2 make while still allowing the studio to stay in business?)
Explanation / Answer
The studio would choose the price of $10 and quantity of 8M as the marginal revenue is equal to the marginal cost.
Price Quantity TR MR FC VC TC MC Profit $18 - - - $10,000,000 - $10,000,000 - ($10,000,000) $17 1000000 $17,000,000 $17,000,000 $10,000,000 $3,000,000 $13,000,000 $3,000,000 $4,000,000 $16 2000000 $32,000,000 $15,000,000 $10,000,000 $6,000,000 $16,000,000 $3,000,000 $16,000,000 $15 3000000 $45,000,000 $13,000,000 $10,000,000 $9,000,000 $19,000,000 $3,000,000 $26,000,000 $14 4000000 $56,000,000 $11,000,000 $10,000,000 $12,000,000 $22,000,000 $3,000,000 $34,000,000 $13 5000000 $65,000,000 $9,000,000 $10,000,000 $15,000,000 $25,000,000 $3,000,000 $40,000,000 $12 6000000 $72,000,000 $7,000,000 $10,000,000 $18,000,000 $28,000,000 $3,000,000 $44,000,000 $11 7000000 $77,000,000 $5,000,000 $10,000,000 $21,000,000 $31,000,000 $3,000,000 $46,000,000 $10 8000000 $80,000,000 $3,000,000 $10,000,000 $24,000,000 $34,000,000 $3,000,000 $46,000,000 $9 9000000 $81,000,000 $1,000,000 $10,000,000 $27,000,000 $37,000,000 $3,000,000 $44,000,000 $8 10000000 $80,000,000 ($1,000,000) $10,000,000 $30,000,000 $40,000,000 $3,000,000 $40,000,000Related Questions
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