Problem:
Robert’s New Way Vacuum Cleaner Company is a recently commenced small business which produces vacuum cleaners and belongs to the monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of the vacuum cleaners per year and P is in dollars. Cost estimation procedures have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2.
Demonstrate all of your computations and processes. Illustrate your answer for each question in complete sentences, whenever it is essential.
Required
1. What are the profit-maximizing output levels and price? Illustrate them and evaluate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and demonstrate the equilibrium point.
2. How much economic profit do you anticipate that Robert’s company will make in the first year?
3. Do you anticipate this economic profit level to continue in following years? Why or why not?