As in Problem 4, demand continues to be given by P = 120

| February 25, 2017

Question
a. As in Problem 4, demand continues to be given by P = 120, but the firm’s cost equation is linear: C = 420 + 60Q. Graph the firm’s revenue and cost curves. At what quantity does the firm break even, that is, earn exactly a zero profit?

In general, suppose the firm faces the fixed price P and has cost equation C = F + cQ, where F denotes the firm’s fixed cost and c is its marginal cost per unit. Write down a formula for the firm’s profit. Set this expression equal to zero and solve for the firm’s break-even quantity (in terms of P, F, and c). Give an intuitive explanation for this break-even equation.

In this case, what difficulty arises in trying to apply the MR = MC rule to maximize profit? By applying the logic of marginal analysis, state the modified rule applicable to this case.

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