Question

Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit.

Answer 1

Answer:

$1.50 per bag

Explanation:

The price that yields a fair rate of return is also the price that makes  economic profit = 0. That sales price = average total cost. So we first must determine total costs for producing 20 million bags:

• total costs = fixed costs + variable costs = $10 million + (20 million x $1) = $30 million

Now we need to determine average total cost:

• average total cost at 20 million bags = $30 million / 20 million bags = $1.50 per bag