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Stark Industries is a monopolistic competitor. It has fixed costs of $1,000 per month and a...

Question:

Stark Industries is a monopolistic competitor. It has fixed costs of $1,000 per month and a constant marginal cost of $1 per unit of production. (Hint: {eq}TC=FC+(MC\cdot Q) {/eq})

(a) Will it earn a monopoly profit if it produces 1,000 units and sells each for $1.50?

(b) Suppose the demand curve facing Stark Industries shifts to the right, so now it can sell 2,000 units at $1.50 each. Will it now earn a monopoly profit?

(c) Why might Stark Industries' demand curve shift to the right?

(d) What must Stark Industries do to find its short-run equilibrium price and quantity?

Profit Maximization:

The profit, which equals total revenue minus total cost, is maximized at the level of production where the marginal revenue equals the marginal cost. Where the marginal revenue equals the change in total revenue with respect to one unit change in output and the marginal cost equals the change in total cost per unit increases in production.

Answer and Explanation:

According to the given information, {eq}TC =1000+Q {/eq}.

(a) The monopoly total revenue (TR) equals $1,500 (= $1.5 * 100). Thus, we have:

  • Profit...

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Profit Maximization: Definition, Equation & Theory

from Intro to Business: Help and Review

Chapter 24 / Lesson 6
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