Assume that the market demand for pens is given by QD = 650 - 25P and the market supply of pens is given by QS = 200 + 20P. If a firm sells 20 pens and faces an average total cost of $6, calculate the firm's profit
What will be an ideal response?
To determine the firm's profit, it is essential to determine the equilibrium price that the firm faces. At equilibrium QD = QS or, 650 - 25P = 200 + 20P or, 450 = 45P or, P = $10.
Profits = Total revenues - Total cost
= Price × Quantity - Average total cost × Quantity
= 10 × 20 - 6 × 20
= 200 - 120
= $80
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