26. A firm is considering setting up a vending machine to sell its products on a university campus. There is no substitute available at present on campus. No other firms selling similar products are expected to enter the campus in future. The firm initially incurs a setup cost of $100 that cannot be recovered. The only other cost of the business is the cost of the product material at $10 for each product sold. Demand function of its product on the campus is estimated to be P = a - Q. Q is quantity sold and P is price. (a) Calculate the profit-maximization price and quantity and the maximized profit level. (b) Calculate the minimum value of a that the firm is willing to enter the campus. (c) Having set up the vending machine on the campus, the firm soon discovers it overestimates the demand. The true value of a is 20. Will the firm withdraw from the campus? Explain with reference to the answer in (b).

26. A firm is considering setting up a vending machine to sell its products on a university campus. There is no substitute available at present on campus. No other firms selling similar products are expected to enter the campus in future. The firm initially incurs a setup cost of $100 that cannot be recovered. The only other cost of the business is the cost of the product material at $10 for each product sold. Demand function of its product on the campus is estimated to be P = a - Q. Q is quantity sold and P is price. (a) Calculate the profit-maximization price and quantity and the maximized profit level. (b) Calculate the minimum value of a that the firm is willing to enter the campus. (c) Having set up the vending machine on the campus, the firm soon discovers it overestimates the demand. The true value of a is 20. Will the firm withdraw from the campus? Explain with reference to the answer in (b).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.10P: Wonopoly and natural resource prices Suppose that a firm is the sole owner of a stock of a natural...

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Wonopoly and natural resource prices Suppose that a firm is the sole owner of a stock of a natural resource. a. How should the analysis of the maximization of the discounted profits from selling this resource (Equation 17.63 be modified to take this fact into account? b. Suppose that the demand for the resource in question had a constant elasticity form q(t)=a[p(t)]b . How would this change the price dynamics shown in Equation 17.67? c. How would the answer to Problem 17.7 be changed if the entire crude oil supply were owned by a single firm?
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