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a
a. What will be the price and output if the government imposes a "fair return pricing" to the firm?
b. Explain how firms can raise funds to expand their operations and illustrate each method with a graph if possible.
Expert Solution
Answer:
The table:
| Q | P | ATC | TC | MC | TR | MR | Profit |
| 0 | 35 | 0 | 0 | ||||
| 1 | 32 | 48 | 48 | 48 | 32 | 32 | -16 |
| 2 | 29 | 30 | 60 | 12 | 58 | 26 | -2 |
| 3 | 26 | 23.34 | 70 | 10 | 78 | 20 | 8 |
| 4 | 23 | 21 | 84 | 14 | 92 | 14 | 8 |
| 5 | 20 | 20 | 100 | 16 | 100 | 8 | 0 |
| 6 | 17 | 19.5 | 117 | 17 | 102 | 2 | -15 |
| 7 | 14 | 19.28 | 135 | 18 | 98 | -4 | -37 |
| 8 | 11 | 18.68 | 149.44 | 14.44 | 88 | -10 | -61.44 |
| 9 | 8 | 18.72 | 168.48 | 19 | 72 | -16 | -96.48 |
The graph:
a. "Fair return pricing": price= 20; output = 5
reason: fair return ricing is set where price = ATC; and profits = 0. (black lines in the graph; shaded gray in the table).
b. If the firm wants to raise revenue, then it can follow some other form of pricing like marginal cost pricing or output regulation where MR = MC.
Marginal cost pricing is where price = MC = 17. (Green lines) - Here output will be 6; revenue = 102; cost = 117. So profit = - 15 (loss) (Shaded in green in the table)
If the firm follows output regulation, it will produce where MR = MC =, and price = 23. (red lines) - Output will be 4; revenue = 92, cost = 84. So profit = 8 (92 - 84 = 8). (Shaded in red on the table)
Thus, if the company wants to raise funds, it must follow output regulation, set MR = MC and earn higher profits.
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