Question

Assume that agriculture prices fall and the farming sector faces a mild recession. The demand for the small tractors drops to: P = 26,000 – Q. 

Suppose the recession is only temporary, and demand will recover soon. What output adjustment should the firm make during the recession?

Answer 1

New demand function is:

$P= 26000-Q$

The firm maximazes output when $MR=MC$

$MR=26000-2Q$

$MC=20000$

$26000-2Q=20000$

$2Q=6000$

$Q=3000$