## Market Demand increasing profit

QUESTION : Market demand is given as QD = 200 – 3P. Market supply is given as QS = 2P + 100. Each identical firm has MC = 0.5Q and ATC = 0.25Q. What is each firm’s profit?

**SAMPLE ANSWER : Profit = Total revenue – Total cost**

**Step 1: To find Total revenue**

**If we equate the Market demand and market supply, we will get the equilibrium price and quantity. Accordingly,**

**200 – 3P = 2P + 100**

**200 – 100 = 2P + 3P**

**100 = 5P**

**P = 100/5 = $20**

**If price = $20, then the total revenue = P x Q = 20Q**

QUESTION : A monopolist faces market demand given by P = 200 – Q. For this market, MR = 200 – 2Q and MC = 3Q. What quantity of output will the monopolist produce in order to maximize profits?

**SAMPLE ANSWER : **

**Profits are maximized at the point where MR = MC.**

**We have to therefore equate MR and MC.**

**MR = 200 – 2Q & MC = 3Q**

**200- 2Q = 3Q**

**200 = 5Q**

**Q = 200/5 = 40 units. This is the profit maximizing output.**

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