The inverse demand for a product is given by P = 400 – 5Q, where Qmeasures the number of units and Pis the price per unit. Suppose that total cost is TC= 100Q+ 2.5Q2with marginal cost per unit of MC= $100 + 5Q. Technological innovation reduces total cost to TC= 25Q+ 2.5Q2 and marginal cost per unit to MC= $25 + 5Q. Identify equilibrium price and quantity before and after the cost reduction. How does profit change?
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