Your consulting firm was just granted an exclusive contract for your state. You now must decide your pricing policy, given the following relationships:
P = $1400 - 0.0004Q
MR = $1400 - 0.0008Q
AVC = $1000
where P is the price, Q the quantity, and AVC the average variable cost.
The firm will encounter no fixed costs, and all revenue is after taxes. As your firm has been granted an exclusive contract, your pricing and output decisions will be those of a monopolist.
Using the data above, calculate the output the firm will provide.
Determine the price at this output level.
Complete the Microsoft Excel Template given below using the data in the problem.
Check whether your data is consistent with your calculations in question 1. Why or why not?
Now assume that the state decides to give as many contracts as it can for the same activity, so your firm is now operating in a perfectly competitive market. How will your price and output decisions change? Explain the differences and why these changes happened.
The Solution finds the output and price for the product as a monopoly and in a perfectly competitively market.