Question

Study the MC and MR curves for a monopoly firm given in the following figure. Calculate the maximum profit assuming that fixed costs are negligible. (All prices and costs are in rupees)

• A. Rs 100
• B. Rs 120
• C. Rs 140
• D. Rs 144

Answer 1

The correct option is A

Rs 100

When q=0, MR =24. When q=12, MR=0.
Hence, the equation of the MR curve is
MR= 24- 2q
The demand curve and the MR curve starts from the same point. Also, the MR curve is twice as steep as the demand curve.
Therefore, the demand curve equation is p = 24- q

Profit-maximization happens when MC=MR. From the figure, MC=MR when q=10.
Corresponding to q=10 in the demand curve, the price is
p =24-10 = Rs 14

Since the fixed costs are negligible, the average cost is equal to the marginal cost.

Hence, the profit
$\Pi =(p-ATC)\times q=(p-MC)\times q=(14-4)\times 10=10\times 10=Rs100$