Calculating equilibrium price/output combination
Just CDs, Inc., has developed a booming business in the purchase and sale of used CDs and used DVDs. Demand and marginal revenue relations for the local college student market are:
P= $6 – $0.00005Q
MR= dTR/ dQ = $6 – $0.0001Q
Fixed costs are nil, and average variable costs are constant at $4 per unit.
A. Calculate the profit-maximizing price/output combination and economic profits if Just CDs enjoys an effective monopoly in the local market.
B. Calculate the price/output combination and total economic profits that would result if Internet competition makes the used CD and used DVD market perfectly competitive.