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Explanation & Answer
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Problems and Discussion
1. With the help of diagrams and arguments, explain how the firm identifies the
optimal level of production and the optimal price level under the following scenarios:
a. The firm is trying to maximise profit.
b. The firm is trying to maximise revenues without a profit constraint.
The firm is trying to maximise revenues with a profit constraint.
d. Suppose there is a decrease in corporate taxation. Using diagrams and arguc.
ments compare the reactions of a profit-maximising firm and a revenue-(with profit
constraint)-maximising firm with respect to the optimal level of production.
Answer for a, b, c, and d:
Revenue maximization occurs when the total revenue of a firm is a maximum and
this happens when the marginal revenue is 0. This is where the marginal revenue
curve hits the horizontal axis. Profit maximization occurs when MC=MR or the
marginal revenue is equal to the marginal cost for a profit maximizing firm. As we
move down the demand curve and the marginal revenue curve for a monopolist the
elasticity of demand decreases, so when marginal revenue decreases, total revenue
increases as elasticity falls and total revenue is maximum when marginal revenue is 0.
A monopolist which is profit maximizing will not produce where revenue is
maximum at point A below. For a price discriminating monopolist the objective
maybe revenue maximization but never for a profit maximizing monopolist. A profit
maximizing monopolist will produce at point B below diagram:
The profit maximization for the monopolistic challenge and imposing business
model is the same that is the benefit is amplified when the peripheral expense is
equivalent to the minimal revenue (MC=MR). In the short run the there is overly
typical benefits in the imposing business model just as the monopolistic challenge
however over the long haul the monopolistic aggressive firm will make back the
initial investment, this is on the grounds that over the long haul there is section of new
of firms in the market so the organizations will be compelled to do the creation
separation. This outcomes in an expanding normal expenses. So the firm is earning
back the original investment therein the imposing business model because of the high
hindrances to the section the firm will have the option to appreciate the supernormal
profits over the long haul as well.
2. Flash Plc competes against Novaphone in the market for mobile phones. The
quality-price trade-off for customers of mobiles is described by the equation below:
Consumer's Perceived Benefit = Quality -1.3 x Price
a. Novaphone sets its quality for mobile phones equal to £400 and its price equal to
£300. If Flash sets its quality equal to £300, how much does it need to set its price in
order to generate more perceived benefit t...