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a) A firm's short run inverse demand function is given by p=150-2q. The short run cost function is C=1500+50q. The fixed cost of 1500 is rent on a building and is unavoidable in the short run. What is the short run profit-maximizing quantity and price? Should the firm shut down in the short run?

WHAT I THINK: The short run profit-maximizing quantity is 25 and the price is $100. The firm should NOT shut down in the short run as there is less of a loss with this decision (-250 > -1500).

b) Now assume that the inverse demand function and cost function given in part a) are long run functions. The only difference is that the fixed cost of 1500 (rent on a building) can be avoided in the long run if the firm shuts down. What would a profit-maximizing firm do now? What is the highest rent the firm can pay and stay in business?

WHAT I THINK: The firm SHOULD shut down in the long run as there is less of a loss (0 > -250). But how do I figure out what is the highest rent the firm can pay and stay in business? :/

 

 

Microeconomics, Economics

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