Evaluating a Firm's Pricing Strategy in a Recession
A manager of a price-setting firm, which operates with fixed wage contracts for its employees, is facing an economic recession. The manager states: 'Our labor costs are fixed, so our marginal cost has not changed. Therefore, to protect our profit margins, we must maintain our current price and simply accept the lower quantity of sales that results from the reduced demand.'
Critically evaluate this manager's strategy. Is maintaining the pre-recession price the profit-maximizing choice for the firm under these conditions? Justify your answer by explaining how a firm finds its optimal price and quantity when its demand curve shifts, and illustrate the situation with a correctly labeled diagram showing the demand curve(s), marginal cost, and relevant isoprofit curves.
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Introduction to Microeconomics Course
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Evaluating a Firm's Pricing Strategy in a Recession
Critiquing a Manager's Recession Strategy