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Calculating equilibrium price/output combination

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Just CDs, Inc., has developed a booming business in the purchase and sale of used CDs and used DVDs. Demand and marginal revenue relations for the local college student market are:

P= $6 - $0.00005Q

MR= dTR/ dQ = $6 - $0.0001Q

Fixed costs are nil, and average variable costs are constant at $4 per unit.

A. Calculate the profit-maximizing price/output combination and economic profits if Just CDs enjoys an effective monopoly in the local market.

B. Calculate the price/output combination and total economic profits that would result if Internet competition makes the used CD and used DVD market perfectly competitive.

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Solution Preview

A. Calculate the profit-maximizing price/output combination and economic profits if Just CDs enjoys an effective monopoly in the local market.

Total Cost, TC=Fixed Cost+ Average Variable Cost*output
TC=0+4*Q=4Q
TC=4Q
Marginal Cost=dTC/dQ=4

A ...

Solution Summary

Solution describes the steps to calculate equilibrium price/output combination in both the cases of monopoly and perfect competition.

$2.19