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Question(s) / Instruction(s):

1. A manager makes the statement that the output should be expanded so long as average revenue exceeds average cost. Does this strategy make sense? Please explain with enough detail to demonstrate your understanding of the material.

 2. Suppose a firm’s inverse demand curve is given by P = 120 – 0.5Q and its cost equation is C = 420 + 60Q + Q^2

a. Find the firm’s optimal quantity, price, and profit by using the profit equation.

b. Suppose instead that the firm can sell any and all of its output at the fixed market price P = 120. Find the firm’s optimal output.

 

3. Assume demand is given by P = 120 and the cost equation is linear: C = 420 + 60Q.

a. At what quantity does the firm break even (i.e., when does the firm exactly a zero profit)?

b. 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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