Robert’s New Way Vacuum Cleaner Company is a recently started small business which manufactures vacuum cleaners and belongs to the monopolistically competitive market. Its demand curve for product is expressed as Q = 5000 – 25P where Q is number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2.
Demonstrate all of your computations and processes. describe your answer for each problem in complete sentences, whenever it is essential.
1. What are the profit-maximizing price and output levels? Describe them and compute 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 expect that Robert’s company will make in first year?
3. Do you expect this economic profit level to continue in following years? Why or why not?