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# Important information about profit maximizing price

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A firm is considering building a bridge. The cost to build the bridge is \$2 million with no maintenance costs. The following table shows demand for bridge:

Price per crossing # of crossings
\$8 0
7 100
6 200
5 300
4 400
3 500
2 600
1 700
0 800

a. What is the profit maximizing price?

b. What is the efficient level of output? why?

c. If the firm is interested in maximizing profit, should it build the bridge?

d. If the government was to build the bridge, what price should the government charge?

e. Should the government build the bridge? Why?

#### Solution Preview

A firm is considering building a bridge. The cost to build the bridge is \$2 million with no maintenance costs. The following table shows demand for bridge:
Price per crossing # of crossings
\$8 0
7 100
6 200
5 300
4 400
3 500
2 600
1 700
0 800
a. What is the profit maximizing price?
The \$2 million is the fixed cost, and doesn't change with the output level.
Now, the function of demand curve can be written into:
P = 8 - Q/100
Then total revenue is TR = P*Q = (8 - Q/100)Q = 8Q - Q^2 /100
Marginal revenue is ...

#### Solution Summary

The profit maximizing price is determined.

\$2.49