Suppose a firm?s inverse demand and cost equations are of the general forms P = a - bQ and C = F + cQ, where the parameters a and b denote the intercept and slope of the inverse demand function and the parameters F and c are the firm?s fixed and marginal costs, respectively. Apply the MR = MC rule to confirm that the firm?s optimal output and price are: Q = (a - c)/2b and P = (a + c)/2. Provide explanations for the ways P and Q depend on the underlying economic parameters.
This question was answered on: Jul 11, 2017
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