The Blue Dragon Restaurant is a new Chinese Restaurant in town. As the only Chin
ID: 1126129 • Letter: T
Question
The Blue Dragon Restaurant is a new Chinese Restaurant in town. As the only Chinese restaurant in the area, it faces the following daily demand curve:
Q = 800 - 40 P
where Q is the number of meals it serves per day and P is the average price of its meals. The cost functions of the restaurant have been estimated as follows:
TC = 220 + 6Q + .02 Q2
MC = 6 + .04 Q
ATC = 220/Q +6 + .02Q ; Slope = -220/Q2 +.02
a. Determine the profit-maximizing price of each meal assuming The Blue Dragon is behaving as a monopoly.
b. Determine the profit of the Restaurant.
c. If the company were to produce as a perfectly competitive firm, how much would it produce?
d. What price should it charge as a competitive firm?
e. Would it still make a profit if it behaved like a competitive firm?
As a result of the success of the Blue Dragon other Chinese restaurants start appearing in the area. As the Blue Dragon's customers gradually start trying other (new) Chinese restaurants, its demand curve gets flatter (more elastic) and shifts to the left. In reaction, The Blue Dragon lowers its price and adjust its output to the point that, eventually, its (economic) profit disappears; It becomes equal to zero. At that point, the slope of its demand curve becomes -0.02.
f. Determine the new (equilibrium) average price The Blue Dragon charges for its meals.
g. Write the equation for this new (zero profit) demand curve.
Explanation / Answer
Q = 800 - 40P
40P = 800 - Q
P = 20 - 0.025Q
(a) A monopolist will maximize profit when Marginal revenue (MR) equals MC.
Total revenue (TR) = P x Q = 20Q - 0.025Q2
MR = dTR/dQ = 20 - 0.05Q
Equating with MC,
20 - 0.05Q = 6 + 0.04Q
0.09Q = 14
Q = 156
P = 20 - (0.025 x 156) = 20 - 3.9 = 16.1
(b) When P = 16.1 and Q = 156,
TR = 16.1 x 156 = 2,511.6
TC = 220 + (6 x 156) + (0.02 x 156 x 156) = 220 + 936 + 486.72 = 1,642.72
Profit = TR - TC = 2,511.6 - 1,642.72 = 868.88
(c) A perfect competitor will maximize profit by equating Price with MC.
20 - 0.025Q = 6 + 0.04Q
0.065Q = 14
Q = 215
(d) When Q = 215,
P = MC = 6 + (0.04 x 215) = 6 + 8.6 = 14.6
(e) When Q = 215 and P = 14.6,
TR = 14.6 x 215 = 3,139
TC = 220 + (6 x 215) + (0.02 x 215 x 215) = 220 + 1,290 + 924.5 = 2,434.5
Profit = TR - TC = 3,139 - 2,434.5 = 704.5
Therefore as a perfect competitor also firm will make a profit.
NOTE: As per Chegg answering guideline, first 5 parts are answered.
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