Assume that you are in the business of building houses. You have analyzed the market carefully, and you know that at a price of $120,000, you will sell 800 houses per year. In addition, you know that at any price above $120,000, no one will buy your houses because the government provides equal-quality houses to anyone who wants one at $120,000. You also know that for every $20,000 you lower your price, you will be able to sell an additional 200 units. For example, at a price of $100,000, you can sell 1,000 houses; at a price of $80,000, you can sell 1,200 houses; and so on.
a. Sketch the demand curve that your firm faces.
b. Sketch the effective marginal revenue curve that your firm faces.
c. If the marginal cost of building a house is $100,000, how many will you build and what price will you charge? What if MC = $85,000?