Question

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion.
Cost Data Demand Data
Total Output Total Cost Quantity Demanded Price
0 $25 0 $60
1 40 1 55
2 45 2 50
3 55 3 45
4 70 4 40
5 90 5 35
6 115 6 30
What will the maximum total profits be?
a) $90
b) $65
c) $85
d) $110

Answer 1

Given the information stated above, the firms maximum total profit will be $90. (Option A) See the explanation below.

What is Maximum Total Profit?

Maximum total profit is the highest profit

What is the calculation supporting the above answer?

It is to be noted that the attached excel spread sheet was computed using the following formulas:

MC(n) = TC(n) - TC(n-1)

MC(n) = marginal cost of nth unit

TC(n) = Total cost of n units of output

MC(1) = 40-25=15 and so on

Recall that

Total Revenue (TR) = Price * Quantity

that is:

TR = P * Q

Marginal Revenue of the nth unit of output  =

TR of the n unit of output - TR of the n-1 units of output.

MR(n)=TR(n)-TR(n-1)

MR(1)=55-0=55 and so on

Recall that Profit = TR  - TC

Thus,

Profit (0) = 0 - 25

= -25 and so on

By observation on the sheet, the maximum profit (that is highest profit attainable) is given as $90.

This corresponds with

• the Quantity of 4 Unit
• The Marginal Revenue of 25; and
• Marginal Cost of 15.

Hence, option A is correct.

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