Question

Assume that you are in the business of building houses in United Kingdom. You have analyzed

the market carefully, and you know that at a price of £120,000, you will sell 800 houses per

year. In addition, you know that at any price above £120,000, no one will buy your houses

because the government provides equal-quality houses to anyone who wants one at £120,000.

You also know that for every £20,000 you lower your price, you will be able to sell an additional

200 units. For example, at a price of £100,000, you can sell 1,000 houses; at a price of £80,000,

you can sell 1,200 houses; and so on.

a. Sketch the demand curve that your firm faces.

b. Sketch the effective marginal revenue curve that your firm faces.

c. If the marginal cost of building a house is £100,000, how many will you build and what

price will you charge? What if MC = £85,000?

Answer 1

a. The demand curve that your firm faces is a downward-sloping line, which begins from the point (800; 120,000) and ends at (2,000; 0).

b. The marginal revenue curve that your firm faces is a downward-sloping line, which begins from the point (800; 120,000) and ends at (1,400; 0).

c. If the marginal cost of building a house is £100,000, then you will build 900 houses, because at this quantity MR = MC, and you will you charge £110,000.

If MC = £85,000, then Q = 975 and P = £102,500.