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    Selling prices

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    A firm has the following short run demand and cost schedule for a particular product

    Q = 200 - 5P
    TC = 400 + 4Q

    a. At what price should this firm sell its product?
    b. If this is a monopolistically competitive firm, what do you think would start to happen in the long run? Explain

    c. Suppose in the long run, the demand shifted to Q = 100 - 5P. What should the firm do? Explain.

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    Solution Preview

    a. At what price should this firm sell its product?
    The demand curve can be written into:
    P = 40 - 0.2Q
    Then total revenue is TR = P*Q = (40 - 0.2Q)Q = 40Q - 0.2Q^2
    The marginal revenue is MR = dTR/dQ = 40 - 0.4Q
    From the total cost function, we know marginal cost is MC = dTC /dQ = 4
    The first order condition for the firm to max its profit is: MR = MC, ...

    Solution Summary

    Selling prices are estimated.