Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republi

Question

Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency The firm has a constant marginal cost of $2.00 per pack and the fixed cost is $20 million. Through market research, the firm has found that there are two types of customer Type 1 and Type 2. The demand curves of the two types of customers, and the total market demand curve, along with respective marginal revenue curves, are shown in the following figure. Price (S per pack) 14 Type 1 Consumers' Demand 12 10 6 4 MC MR 4850 Quantity (millions 10 20 24 30 40 of packs) Price Save and Submit to save and submit. Click Save All Answers to save all answers

Explanation / Answer

Correct Answer:

$260 million

Working note:

Profit will be maximized when the monopolist will successfully apply MR=MC for both type of customers.

Total Revenue = 20 million *$7 + 60 million* $5 = $440 million

Total cost = fixed cost + total variable cost = 20 + (20+60)*2 = 180 million

Net profit = Total Revenue – Total cost = 440-180

Net profit = $260 million

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