Answer to Question #278975 in Economics for Ali

Question

2. A manufacturer of electronics products has developed a handheld

computer, for which the cost of production is given below. Also given are

Quantities and prices that the firm believes it will be able to sell.

Q (1000)​ Price ​MR ​AVC ​AC ​MC

0​​1650

1 ​​1570 ​1570 ​1281​ 2281 ​1281

2​​ 1490 ​1410​ 1134​ 1634​ 987

3 ​​1410​ 1250​ 1009 ​1342.33 759

4 ​​1330 ​1090​ 906 ​1156​ 597

5 ​​1250 ​930​ 825 ​1025 ​501

6 ​​117 ​770​ 766​ 932.67 ​471

7 ​​1090​ 610​ 729​ 871.86 507

8 ​​1010​ 450 ​714 ​839 ​609

9 ​​930 ​290​ 721​ 832.11 777

10​​ 850 ​130 ​750 ​850 ​1011 

(a) What price should the firm charge if it wants to maximize profit in the short

run?

(b) What arguments cam be made for charging a price higher than this price? If a

higher price is indeed established, what amount would you recommend?

Explain.

(c) What arguments cam be made for charging a price lower than the profit

maximizing level? If a lower is indeed established, what amount would you

recommend? Explain.

Answer 1

(a) The price the firm should charge is between 850 and 930 (P = MC), if it wants to maximize profit in the short run, because MR = MC at this point.

(b) The existence of monopolistic power makes possible charging a price higher than this price. If a higher price is indeed established, we would you recommend producing output between 7 and 8 thousand units, where MR = MC.

(c) In the long run the firm will produce at P = ATC at a price lower than the short run profit maximizing level. P = ATC = 850 when 10 thousand units are produced.