You are given the following data for your firm, which sells high-capacity video
ID: 1195295 • Letter: Y
Question
You are given the following data for your firm, which sells high-capacity video MP3 players.
Q
P
TC
0
78
$100,000
1,000
76
$125,500
2,000
74
$144,000
3,000
72
$158,500
4,000
70
$172,000
5,000
68
$187,500
6,000
66
$208,000
7,000
64
$236,500
8,000
62
$276,000
9,000
60
$329,500
10,000
58
$400,000
Question 1
Which of the following represents the correct formulas for P and MR in terms of QD?
Select one:
a. P = 78 - 0.002QD; MR = 78 - 0.004QD
b. P = 39,000 - 500QD; MR = 39,000 - 250QD
c. P = 78 - 0.004QD; MR = 78 - 0.008QD
d. P = 39,000 - 500QD; MR = 39,000 - 1,000QD
Question 2
Which of the following equations is correct, based on the data above?
Select one:
a. MC = 0.0000015Q2 - 0.01Q + 30
b. ATC = 0.0000005Q3 - 0.005Q2 + 30Q + 100000
c. AVC = 0.0000005Q2 - 0.005Q + 30/Q
d. AVC = 0.0000005Q2 - 0.005Q + 30 + 100000/Q
Question 3
The profit-maximizing quantity occurs at _______ and at _________.
(Since MC is in terms of Q2, solving with calculus and algebra can be messy. Your table should give an exact answer.)
Select one:
a. Q = 6,000; P = $66
b. Q = 8,000; P = $62
c. Q = 8,000; P = $46
d. Q = 2,000; P = $74
Question 4
How much total profit would your firm earn if you set P and Q at their profit-maximizing levels?
Select one:
a. $496,000
b. $276,000
c. $220,000
d. $0; break even.
Question 5
Describe the competitiveness of the market by calculating the Lerner index.
Select one:
a. 25.8%
b. 46%
c. 62%
d. 34.8%
Q
P
TC
0
78
$100,000
1,000
76
$125,500
2,000
74
$144,000
3,000
72
$158,500
4,000
70
$172,000
5,000
68
$187,500
6,000
66
$208,000
7,000
64
$236,500
8,000
62
$276,000
9,000
60
$329,500
10,000
58
$400,000
Explanation / Answer
Question 1 and 2 have already been solved correctly.
Question 3: Explanation
The solving the equations complicates the question. As suggested use the table. Since all information has already been found ( it is correct, though rounding off in the MC column is not suggested) use that information to solve the question.
Here, the profit maximizing level is found at the point where MR=MC or last point where MR>MC, which is given at P=62; Q=8,000 as MR at that point is 48, which is above the MC of 39.5. After this point MR drops to 44 and MC climbs up to 53.5 which is MR and therefore will result in losses.
Answer: P=62; Q=8,000
The losses being seen are due to calculating TC. Profit maximizing level is calculated by MC, thereby implying TVC and not TC. There may be an overall loss, but there is operating profit, and as long as there is operational profit, the firm will keep producing as it is better to take a loss of 9,811 (as calculated) rather than taking a loss of 100,000 by not producing at all (this is the fixed cost).
Question 4 is also correctly solved.
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