Suppose you own a business form that faces the following demand curve: P = 8 0 - 2 Q . Further, MC = AC = $ 2 0 . Under “ the benchmark case ” , calculate the maximum amount of profits your firm can earn. 2 . Suppose you are earning the maximum profit, but your lease is up for renewal and the property owner wants to increase the rent by $ 5 0 0 . a . In response to the $ 5 0 0 additional cost, would you raise the price to cover the additional cost? Explain why you would or would not. Notice, rent is a fixed cost. b . In response to the $ 5 0 0 additional cost, suppose you implement a two - part tariff pricing strategy. Compute the amount of profit under the two - part tariff. c . Explain why the revenue is necessarily higher under the two - part than under the benchmark case.
Suppose you own a business form that faces the following demand curve: P = 8 0 - 2 Q . Further, MC = AC = $ 2 0 . Under “ the benchmark case ” , calculate the maximum amount of profits your firm can earn. 2 . Suppose you are earning the maximum profit, but your lease is up for renewal and the property owner wants to increase the rent by $ 5 0 0 . a . In response to the $ 5 0 0 additional cost, would you raise the price to cover the additional cost? Explain why you would or would not. Notice, rent is a fixed cost. b . In response to the $ 5 0 0 additional cost, suppose you implement a two - part tariff pricing strategy. Compute the amount of profit under the two - part tariff. c . Explain why the revenue is necessarily higher under the two - part than under the benchmark case.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Suppose you own a business form that faces the following demand curve: P
=
8
0
-
2
Q
.
Further, MC
=
AC
=
$
2
0
.
Under
“
the benchmark case
”
,
calculate the maximum amount of profits your firm can earn.
2
.
Suppose you are earning the maximum profit, but your lease is up for renewal and the property owner wants to increase the rent by $
5
0
0
.
a
.
In response to the $
5
0
0
additional cost, would you raise the price to cover the additional cost? Explain why you would or would not. Notice, rent is a fixed cost. b
.
In response to the $
5
0
0
additional cost, suppose you implement a two
-
part tariff pricing strategy. Compute the amount of profit under the two
-
part tariff. c
.
Explain why the revenue is necessarily higher under the two
-
part than under the benchmark case.
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