What price should a firm charge for a package of two shirts given a marginal cost of $4 and an inverse demand function P = 8 − 2Q by the representative consumer?
A) $4
B) $8
C) $12
D) $16

Question

Quizplus · Accepted Answer

To determine the optimal price, we need to find the profit-maximizing quantity and then substitute it into the inverse demand function to find the corresponding price.

To find the profit-maximizing quantity, we need to set marginal cost equal to marginal revenue. Since the inverse demand function is P=8-2Q, the corresponding marginal revenue function is MR=8-4Q. Setting MR equal to MC, we get:

8-4Q = 4

Solving for Q, we get Q=1.

Now that we have the profit-maximizing quantity, we can substitute it into the inverse demand function to find the corresponding price:

P = 8 - 2Q = 8 - 2(1) = 6

Since the package includes two shirts, the total price would be twice the price of a single shirt:

Total Price = 2 x Price of One Shirt = 2 x 6 = $12.

Therefore, the best choice is C.

What Price Should a Firm Charge for a Package of Two