Question 2

Suppose that hot dog seller at St Kilda beach is a monopoly and faces a daily (inverse) demand curve of P = 200 - 0.1Q, where P is the price of hot dog in cents and Q is the number of hot dogs sold per day

1. If the marginal cost of a hot dog is constant at 80 cents, what are the profit maximising quantity and price? Calculate the profit for the hot dog vendor if the average cost of production is the same as the marginal cost (80 cents)

2. What is the price elasticity of demand for hot dogs at the equilibrium price? If the hot dog seller was a revenue maximiser, should it raise or lower the price of hot dogs? Explain.