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A manufacturer of electronic products has just developed a handheld computer. Following is the cost schedule for producing these computers on a monthly basis. Also included is a schedule of prices and quantities that the firm believes it will be able to sell (based on previous market research).

Q Price MR AVC AC MC
0 \$1,650
1 \$1,570 \$1,570 \$1,281 \$2,281
2 \$1,490 \$1,410 \$1,134 \$1,634
3 \$1,410 \$1,090 \$1,009 \$1,342.33
4 \$1,330 \$1,090 \$906 \$1,156
5 \$1,250 \$930 \$825 \$1,025
6 \$1,170 \$770 \$766 \$932.67
7 \$1,090 \$610 \$729 \$871.86
8 \$1,010 \$450 \$714 \$839
9 \$930 \$290 \$721 \$832.11
10 \$850 \$130 \$750 \$850

a. What price should the firm charge if it wants to maximize its profits in the short run?

b. What arguments can be made for charging a price higher than the profit-maximizing price? What exactly price would you recommend? Explain.

c. What arguments can be made for charging a lower than the profit-maximizing price? What price from the available prices do you recommend? Explain.

#### Solution Preview

Please refer attached file for better clarity of tables.

Solution:

a.What price should the firm charge if it wants to maximize its profits in the short run?

Q Price MR AVC AC MC Total Revenue (P*Q) Total Cost (AC*Q) Profit (TR-TC)
0 \$1,650
1 \$1,570 \$1,570 \$1,281 \$2,281 \$1,570 \$2281 (\$711)
2 \$1,490 \$1,410 \$1,134 \$1,634 \$987 \$2,980 \$3,268 (\$288)
3 \$1,410 \$1,090 \$1,009 \$1,342.33 \$759 \$4,230 \$4,027 \$203
4 \$1,330 \$1,090 \$906 \$1,156 \$597 \$5,320 \$4,624 \$696
5 \$1,250 \$930 \$825 ...

#### Solution Summary

Solution describes the steps for calculating profit maximizing price and output. It also discusses the reasons for charging lower or higher prices than optimal price.

\$2.19