Sally’s Strudel is a located in a small town that has no other strudel producers. Market research indicates that the weekly inverse demand for a strudel would be P=8-(1/50)Qd , where P is price and QD is quantity demanded.
Because Sally’s Strudel is the only supplier, they will have a monopoly. The rent on Sally’s shop is $500 a week and this is a fixed cost. In addition, the production of each additional strudel costs Sally’s Strudel $1 to produce.
A) The total cost function for producing strudel, as a function of Q is: ______________________.
B) The marginal revenue curve as a function of Q, is: ________________________________________________.
C) The marginal cost of producing a strudel is:
D) Compute Sally’s Strudel’s profit maximizing output and price. What are her profits?
E) True/False, and explain using precise numbers: At the optimal level of output, the MR=P=MC for a monopolist.
F) What is the price elasticity of demand for Sally’s Strudel at the profit maximizing level of output?
-Is the price elasticity of demand elastic or inelastic?
-Could it ever be the opposite of what you said above?
G) The plaza where Sally’s Strudel is located is being renovated and rents are expected to increase. Assuming the demand for Sally’s Strudel doesn’t change with the renovation, and rent goes up by $500/week to $1000/week, will Sally’s Strudel stay in business in the short run and the long run? (Hint: Use your intuition here, you don’t need to do much more math – think about how the rent will affect their choices and profits). Include a discussion of the short run rule and profits.