Posted by Bob on Thursday, December 14, 2006 at 8:04am.
The Blue Dragon Restaurant is a new Chinese Restaurant in town. As the only Chinese restaurant in the area, it faces the following daily demand curve:
Q = 500 – 25 P
Where Q is the number of meals it serves per day and P is the average price of its meals.
The cost function of the restaurant has been estimated as follows:
TC = 200 + 8 Q + .02 Q^2
a. Determine the profit-maximizing price of each meal assuming The Blue Dragon is behaving as a monopoly.
b. Determine the profit of the Restaurant.
c. If the company were to produce as a perfectly competitive firm, how much would it produce?
d. What price should it charge as a competitive firm?
e. Would it still make a profit if it behaved like a competitive firm?
As a result of the success of the Blue Dragon other Chinese restaurants start appearing in the area. As the Blue Dragon’s customers gradually start trying other (new) Chinese restaurants, its demand curve gets flatter (more elastic) and shifts to the left. In reaction, The Blue Dragon lowers its price and adjust its output to the point that, eventually, its (economic) profit disappears; It becomes equal to zero. At that point the slope of its demand curve becomes -0.03 .
f. Determine the new (equilibrium) average price The Blue Dragon charges for its meals.
g. Write the equation for this new (zero profit) demand curve.
Hint:
MC = 8 + .04 Q
Slope of ATC = -200/Q^2 + .02
On Wed., Dec 13, Heather asked a very similar question. See my post.
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