A firm with market power faces the following estimated demand and average variable cost functions:Qd = 39,000 - 500P + 0.4M - 8,000PRAVC = 30 - 0.005Q + 0.0000005Q2where Qd is quantity demanded, P is price, M is income, and PR is the price of a related good. The firm expects income to be $40,000 and PR to be $2. Total fixed cost is $100,000. The firm should ________ because ________.
A. operate, P = $60.50 > AVC = $25.50
B. operate, P = $62 > AVC = $22
C. shut down, P = $62 < TVC = $229.50
D. operate, P = $62 > AVC = $17.50
Answer: B
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