Question 1
Tobacco King is a monopolist in the cigarette market in the Nicotiana Republic, where the Singapore dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. The firm’s demand curve can be expressed as P = 8 – 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $).
- In a table showing Tobacco King’s demand schedule, total revenue, average revenue, and marginal revenue for prices $2, $4, $6, and $8.
- Based on the table created in your answer to part (a), show Tobacco King’s average revenue and marginal revenue curves on a graph. Comment on why the MR curve lies below the AR curve in 100 words or less.
- Add the marginal cost curve to the graph drawn in part (b). Find the price and quantity combination of cigarette packets at which Tobacco King will maximize its profit.