Now assume that the firm described in problem 5 faces a fall in demand such that the

Question:

Now assume that the firm described in problem 5 faces a fall in demand such that the new demand curve is P = 8 - 0.08Y.

(a) What is the equation for the firm’s new marginal revenue curve (MR₁)?

(b) If the firm is to maintain its original level of output (Y₀), what must happen to its marginal cost of production? What is the “required” marginal cost (MC₁)?

(d) If MC remains at $3.00, and there are no menu costs, what output would the firm choose to produce to maximize profits? What price will it set?

(e) If the firm maintains the original price, what is the maximum quantity that it can sell, given the new lower level of demand?

(f) Calculate the profits lost and gained if the firm chooses to reduce the price from the original price to the new lower price associated with the original quantity.

(g) What is the maximum value for menu costs under which we could expect this firm to maintain its original output (assuming that it could reduce its marginal costs to the required level)?

(h) If menu costs are greater than $22.00, and marginal costs cannot be reduced below $3.00 due to contractual input prices, would the firm seek to maximize profits by choosing the solution found in problem 6(d) (that is, where MC₀ = MR₁)?