1. A manufacturing company produces and sells small farm tractors. Its annual fixed costs are $15 million, and its marginal cost per tractor is $20,000. Demand for small tractors is given by:

P = 30,000 – Q, where P denotes price in dollars and Q is annual sales.

MR = 30,000 – 2Q = 20,000

(a) Find the firm's profit-maximizing output, price, and annual profit.

(b) Assume that agriculture prices fall and the farming sector faces a mild recession. The demand for the small tractors drops to:

P = 26,000 – Q.

MR = 26,000 – 2Q

Suppose the recession is only temporary, and demand will recover soon. What price and output adjustment should the firm make during the recession?