The market demand for a monopoly firm is estimated to be: where is quantity demanded,P is price,M is income,and is the price of a related good.The manager has forecasted the values of M and will be $50,000 and $20,respectively,in 2016.The average variable cost function is estimated to be Total fixed cost in 2015 is expected to be $4 million.The manager should ________________ because_____________.

Question

The market demand for a monopoly firm is estimated to be:  where  is quantity demanded,P is price,M is income,and  is the price of a related good.The manager has forecasted the values of M and  will be $50,000 and $20,respectively,in 2016.The average variable cost function is estimated to be  Total fixed cost in 2015 is expected to be $4 million.The manager should ________________ because_____________.

Quizplus · Accepted Answer

To determine whether the manager should operate or shut down the firm, we need to compare the market price with the firm's average variable cost (AVC). If P > AVC, the firm should operate. If P < AVC, the firm should shut down. If P = AVC, the firm is indifferent between operating and shutting down. 
The AVC of the firm is not given in the question, so we cannot use option B or D. 
To calculate the firm's total cost (TC), we need to add the total fixed cost (TFC) to the total variable cost (TVC). Since the TFC is $4 million, we can calculate the AVC as follows: AVC = (TFC + TVC) / Q, where Q is the quantity of output produced by the firm. 
We do not have the quantity output by the firm, but we know that the market demand function is 11eab534_6952_4eeb_9198_c9d5aaef8dba_TB2562_11, which implies that the firm faces a downward-sloping demand curve. Therefore, the manager should set a price that maximizes the profit given the demand and cost conditions. 
However, we can use the given information about the market demand function and the manager's forecasted values of M and 11eab534_6952_75fe_9198_7f1e7d38ad0f_TB2562_11 to determine whether the price will likely be greater or less than AVC. Since $20 is the price of a related good, we cannot make a precise prediction about the equilibrium price, but we can make an educated guess. 
If we assume that the other relevant factors are held constant, an increase in income generally leads to an increase in demand. Therefore, we can expect that the market demand for the firm's product will increase in 2016 compared to 2015. Since the manager has forecasted that M will be $50,000 in 2016, we can assume that Q will also increase. If Q increases and the other relevant factors are held constant, the AVC is likely to decrease due to economies of scale. 
Therefore, we can expect that the price in 2016 will be higher than the AVC, which means that the firm should operate. Option C is the only option that suggests the firm should operate.

The Market Demand for a Monopoly Firm Is Estimated to Be