Overheard at the water cooler: "The demand and cost estimates that were provided at the meeting are very useful [Q - 90 - 6.5P and TC = 150 + 3.5Q]. Unfortunately what we didn't realize at the time was that our fixed costs were underestimated by at least 30 percent. This means that we'll have to adjust our price upward by at least 30 percent to cover the added fixed cost. In any case, there is no way in the world that we can survive by charging less than $9 for our product."
a. Comment on this statement. Do you agree with the speaker? Explain. Illustrate your answer with the use of a graph indicating the firm's short-run cost structure.
b. What price do you think this firm should charge if it wants to maximize its short-run profit?