Question

Suppose you are the marketing manager for Fruit of the Loom. An individual's inverse demand for Fruit of the Loom women's underwear is estimated to be P = 25 − 3Q (in cents). If the cost to Fruit of the Loom to produce an item of women's underwear is C(Q) = 1 + 4Q (in cents), compute the profit Fruit of the Loom will earn by charging the optimal block price.

Answer 1

Answer:  Profit of charging the optimal block price is 73.5 cent or $0.74.

Explanation:

Given that,

The inverse demand function: P = 25 − 3Q (in cents)

Cost of producing = C(Q) = 1 + 4Q (in cents)

By charging the optimal block price, the firm produce at a point where

Price = Marginal Cost (MC)

MC = 4

Therefore,

25 − 3Q = 4

Q = 7

Consumer Surplus = Profit of charging the optimal block price=0.5 × (y-intercept of the demand curve -MC) × Q

= 0.5(25 - 4) × 7

= 73.5 cent

It is equivalent to $0.74.