The market demand for a monopoly firm is estimated to be:
Qd = 80,000 -400P + 3M + 2000PR
where Q is output, P is price, M is income, and PR is the price of a related good. The manager has forecasted the values of M and PR will be $60,000 and $15, respectively, in 2008.
The average variable cost function is estimated to be
AVC = 725 - 0.01 Q + 0.000001 Q 2
Total fixed cost in 2008 is expected to be $50,000.
The manager should
shut down; P = $362.50 < TVC = $820
shut down; P = $712.50 < AVC = $725
operate; P = $725 > AVC = $700
operate; P = $712.50 > AVC = $700