Profit Maximization in a Monopoly for Sears Two-Step Carpet Cleaning Process

Please refer attached file for better clarity of tables and formulas.

Solution:

A) Assume the following table shows relevant information for Sear's two-step carpet cleaning business in a
medium-size metropolitan area. Complete the following table.

Sq/Yards Output Price Total Revenue ($000) Marginal Revenue ($000) Total Cost ($000) Marginal Cost ($000)
Price *Output Change in TR/Change in Output Change in TC/Change in Output
0 $30 $0 $0
1 $28 $28 $28 $26 $26
2 $26 $52 $24 $48 $22
3 $24 $72 $20 $68 $20
4 $22 $88 $16 $88 $20
5 $20 $100 $12 $100 $12

B) While Sear's enjoys a monopoly position, what is their output, price, and profit at the profit-maximizing activity level?
Sq/Yards Price Total Revenue ($000) Marginal Revenue ($000) Total Cost ($000) Marginal Cost ($000) Profit ($000)
Price *Output Change in TR/Change in Output Change in TC/Change in Output TR-TC
0 $30 $0 $0 0.00
1 $28 $28 $28 $26 $26 2.00
2 $26 $52 $24 $48 $22 4.00
3 $24 $72 $20 $68 $20 4.00
4 $22 $88 $16 $88 $20 0.00
5 $20 $100 $12 $100 $12 0.00

We find frm the above table that MC=MR at two points
At Output level of 3, MC=MR=$20, Profit =$4000
At Output level of 3, MC=MR=$12, Profit =$0
Since Sear's enjoys a monopoly, it can enjoy economic profits, profit maximizing level is at Q=3000 square yards.
out put = 3000 square yards
Price = $24 per sq. yard, Profit = $4000

C) What is the output, price, and profit for this product if a monopolistically competitive equilibrium evolves in this
market following the successful introduction of competitor services? (Assume similar costs conditions for each firm).
As more and more competitor enters into the market, Profit tends to decrease. Finally it reaches to zero at equilibrium.
At Output level of 3, MC=MR=$12, Profit =$0
Output at this level=5000 square yards
Price =$20 per sq. yard, Profit=0

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