You are a producer of semi-trucks. Because it takes a long time to build a semi-
ID: 1117500 • Letter: Y
Question
You are a producer of semi-trucks. Because it takes a long time to build a semi-truck, you make your output decisions before the demand information is actually revealed. The best prediction of what the demand for semi-trucks will be next year is a demand curve where:
P = 4000 – 2 Q,
Where P is the market price and Q is the total output in the market from all suppliers.
Answer each of the following questions. Explain your answers and show your work. You should be able to come up with numerical answers.
Say you are the only producer in the industry and you face a constant marginal cost of 400 to produce semi-trucks. What quantity will you choose and what will be the price you receive for semi-trucks? What will be your economic profits? (3 points)
Explanation / Answer
Profit is maximized by equating Marginal revenue (MR) with Marginal cost (MC).
P = 4000 - 2Q
Total revenue (TR) = P x Q = 4000Q - 2Q2
MR = dTR / dQ = 4000 - 4Q
Equating with MC,
4000 - 4Q = 400
4Q = 3600
Q = 900
P = 4000 - (2 x 900) = 4000 - 1800 = 2200
Profit = Q x (P - MC) = 900 x (2200 - 400) = 900 x 1800 = 1,620,000
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