Aruna owns Pottery Plus, a small firm that produces terra cotta pots for sale in the Edmonton area. The graph above represents Aruna’s situation. Pottery Plus has two rival firms. Aruna is convinced that she dare not raise her price because her rivals will not raise their prices, and she dare not decrease her price because her rivals will simply match her lower price. a. What price does Aruna charge? $ b. What quantity does she produce? units produced c. If her marginal costs are MC1 is she producing the optimal output? d. If her marginal costs increase to MC2 will she reduce her output?

Aruna owns Pottery Plus, a small firm that produces terra cotta pots for sale in the Edmonton area. The graph above represents Aruna’s situation. Pottery Plus has two rival firms. Aruna is convinced that she dare not raise her price because her rivals will not raise their prices, and she dare not decrease her price because her rivals will simply match her lower price. a. What price does Aruna charge? $ b. What quantity does she produce? units produced c. If her marginal costs are MC1 is she producing the optimal output? d. If her marginal costs increase to MC2 will she reduce her output?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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