Answer
A. Profit maximizing price is p* and output is q*
B. The area shaded in red; profit is the profit maximizing price minus the average total cost, multiplied by the profit-maximizing quantity.
C. Consumer surplus is the area shaded blue and the DWL is the area shaded green.
D. The firm would make less profit. This particular firm would still be making positive economic profit, since MR is greater than ATC. Sparkle's customers would get a lower price, and consumer surplus would increase.
Work Step by Step
A. Find where MR and MC meet for the profit maximizing output. For the price, raise that point until it hits demand.
B. Not applicable
C. Consumer surplus is the area between the demand and the price charged by the firm. DWL is the area between the efficient output/price and the current output/price.
D. The efficient level of output is greater than the current output, so for the firm to produce more, it must lower its price.
