The manager of a monopoly firm obtained an estimate of the demand function for its output in 2010 to be:
Q=2,600-100P +0.2M -500PR
Where M = family income, P = price of the good of the monopoly, and PR = price of another good related to the monopolist's good.
He also obtained an estimate of the average variable cost function to be: AVC 20-0.070 +0.0001Q2
Establish the:
a. Estimated marginal cost function
(3 marks)
b. Optimal production level in 2010 (Hint: MR = 56-0.02Q)
(3 marks)
c. Optimal price in 2010
(3 marks)
d. A check to make sure that the firm should actually produce in the short run rather than shut down.
(3 marks)
Further to that, the manager expects fixed costs in 2010 to be £22,500.
e. What is the firm's expected profit or loss in 2010? (3 marks)