Sticky Stuff produces cases of taffy in a monopolistically competitive market. T

Question

Sticky Stuff produces cases of taffy in a monopolistically competitive market. The inverse demand curve for its product is P = 50 - Q, where Q is in thousands of eases per year and P is dollars per case. Sticky Stuff can produce each ease of taffy at a constant marginal cost of $10 per case and has no fixed cost. Its total cost curve is therefore TC = 10Q. To maximize profit, how many eases of taffy should Sticky Stuff produce each month? What price will Sticky Stuff charge for a case of taffy? How much profit will Sticky Stuff cam each year? In reality, firms in monopolistic competition generally face fixed costs in the short run. Given the information above, what would Sticky Stuff s fixed costs have to be order for this industry to be in long-run equilibrium? Explain.

Explanation / Answer

a.

P = 50 – (1/1,000)Q

TR = PQ = 50Q – 0.001Q^2

MR = Derivative of TR with respect of Q

       = 50 – 0.002Q

MC = 10

The equilibrium condition is MR = MC

50 – 0.002Q = 10

0.002Q = 40

Q = 20,000

Answer: 20,000 cases should be produced in each month

b.

P = 50 – (1/1,000)Q

Putting Q = 20,000 in P

P = 50 – 20 = 30

Answer: The price charged is $30

c.

Profit = TR – TC

          = (20,000 × 12 × $30) – (20,000 × 12 × $10)

          = 7,200,000 – 2,400,000

          = $4,800,000 (Answer)

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