Maximizing Profits and Monopoly Market

ECONOMICS
STUDENT ID:
[Pick the date]

Question 1
a) In order to maximize profits, marginal cost should be equal to marginal revenue. The relevant
computations based on the data provided are summarized below.
It is evident from above that MR=MC =$ 6 when the output is 8 T shirts a day. The price
charges is $ 6 per T shirt so the total price charged = 8*6 = $ 48.
Total cost = $34.50
Hence, profit = $48-$ 34.50 = $ 13.50
b) The requisite graph is shown below.

c) If the equilibrium price will decrease to $ 2.5 per unit, then MR = $2.5.The quantity for
which MC =$2.5 is 5 T-shirts per day.
Total revenue = 2.5*5 = $ 12.5
Total cost for 5 shirts = $ 21
Hence, loss realized = $ 21 - $ 12.5 = $ 8.5
d) The requisite graph is as shown below.
e) Sam should not shutdown the T Shirt business at an equilibrium price of $ 2.5 since the AVC
at this level is $ 2.2. Since Sam is able to cover the variable cost associated with the T shirts
production, hence in the short run, the firm should continue operations. However, if a similar
situation is witnessed in the long run, then the firm should shut down (Arnold, 2015).
Question 2
a) The relevant diagram for a natural monopoly is shown below.