The annual profit that the video store expects to make is $4.50.
It should be noted that equilibrium quantity is the point where the marginal revenue is equal to the marginal cost.
Total revenue will be:
= Price × Quantity
= (3.5 - 0.5Q)Q
= 3.5Q - 0.5Q²
Marginal revenue = 3.5 - Q
Then, the marginal revenue will be equated to the marginal cost. This will be:
3.5 - Q = 0.5
Q = 3
Substituting Q into the price equation will be:
P = 3.5 - 0.5Q.
P = 3.5 - 0.5(3)
P = 3.5 - 1.5
P = 2.0
Therefore, the firm should charge a fixed price of $1.5 and a variable price of $0.5
Profit = Total revenue - Total cost
Profit = 6 - 1.5
Profit = 4.5
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