A price-setting firm faces the following estimated demand and average variable cost functions: $Q _ { d } = 800,000 - 2,000 P + 0.7 M + 4,000 P _ { R }$ $A V C = 500 - 0.03 Q + 0.000001 Q ^ { 2 }$ where $Q _ { d }$ is the quantity demanded,P is price,M is income,and $P _ { R }$ is the price of a related good.The firm expects income to be $40,000 and $$P _ { R }$$ to be $53.Total fixed cost is $2,600,000.The firm should ______________ because _______________.

Question

Quizplus · Accepted Answer

To determine the correct choice, we first calculate the quantity demanded (Qd) using the given demand function and the values for M ($40,000) and $P_R$ ($53). Then, we use the calculated Qd to find the average variable cost (AVC) from the AVC function. Finally, we compare the price (P) that the firm can set to maximize profit with the AVC to decide whether the firm should operate or shut down. In this case, choice B suggests that operating is feasible because the price at which the firm can sell its product is higher than the average variable cost, indicating that the firm can cover its variable costs and contribute to covering its fixed costs.

A Price-Setting Firm Faces the Following Estimated Demand and Average Qd=800,000−2,000P+0.7M+4,000PRQ _ { d } = 800,000 - 2,000 P + 0.7 M + 4,000 P _ { R }Qd​=800,000−2,000P+0.7M+4,000PR​

A Price-Setting Firm Faces the Following Estimated Demand and Average $Q _ { d } = 800,000 - 2,000 P + 0.7 M + 4,000 P _ { R }$