Question

2. Dr. Usha, a well-known surgeon, with a reputation of being one of the best surgeons in the region, enjoys a substantial degree of market power and has fixed costs per month at $8000. She has estimated her demand curve and average variable cost function per month to be as follow:
Q = 480 – 0.2P
AVC = 2Q2 – 15Q +400


a) If the doctor wishes to maximize her profits, how many nose operations should she perform each month and at what price? How much profit does she earns in each month?



b) Explain possible reasons why she can enjoy such high economic profits.

Answer 1

revenue = price * quantity = pq = 5q(480-q)
total cost for q units is 8000 + q*avc = 8000 + q(2q^2-15q+400)
profit = revenue - cost = 5q(480-q) - (8000 + q(2q^2-15q+400))
max profit is 20,000 at q=20