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Finding the optimal output and price levels

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Industry demand is given by: Q = 660 - P [with the proviso that Q must be at least 20]

All firms in the industry have identical cost structures. The industry's total cost has fixed cost of 6000 and constant variable cost of 50.

Calculate the following:

a) If the industry is perfectly competitive, what will industry output be? What will be the equilibrium price? What profit will each firm earn?

b) Now suppose that there are five firms in the industry, and that they collude to set a price. What price will they set? What will be the output of each firm? What will be the profit of each firm? How much did total production go down because of the collusion? How much did the price go up?

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Solution Preview

Industry demand is given by: Q = 660 - P [with the proviso that Q must be at least 20]

All firms in the industry have identical cost structures - the industry's total cost has fixed cost of 6000 and constant variable cost of 50.

Calculate the following:

a) If the industry is perfectly competitive, what will industry output be? What will be the equilibrium price? What profit will each firm earn?

Q=660-P
P=660-Q

Total ...

Solution Summary

Solution describes the steps to find out the optimal price, output and profit in the given case of prefect competition and monopoly.

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Finding optimal output and price levels

Tyvex LLC produces professional quality color laser printers. The market for professional color laser printers is monopolistically competitive. Assume that the inverse demand curve faced by Tyvex (given its competitors' prices) can be expressed as
P = 5,000 - .2Q
and Tyvex's total costs can be expressed as

TC = 20,000,000 + .05Q2.

a) What price and quantity will Tyvex choose?

b) Is this likely to be a long-run equilibrium for Tyvex LLC? Why or why not?

c) If not, what is likely to happen in the market for professional color laser printers, and how will it affect Tyvex?

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