Scribd
Upload
331 views

Assignment 4

The document discusses demand curves and elasticities for various products: 1) A video game company's market demand curve was calculated using retail and wholesale demand curves. The profit-maximizing price was found to be $40 with profits of $250,000. 2) For Best Buy, the revenue-maximizing output was found to be 1500 units at $600 per unit, yielding $9 million in revenue but $3 million loss. The profit-maximizing output was 5000 units at $1000 per unit, with $5 million in revenue and $1 million in profit. 3) For a grocery store, a 15% increase in recreation prices would increase food sales by 2.25% due

Uploaded by

eric stevanus
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
331 views

Assignment 4

The document discusses demand curves and elasticities for various products: 1) A video game company's market demand curve was calculated using retail and wholesale demand curves. The profit-maximizing price was found to be $40 with profits of $250,000. 2) For Best Buy, the revenue-maximizing output was found to be 1500 units at $600 per unit, yielding $9 million in revenue but $3 million loss. The profit-maximizing output was 5000 units at $1000 per unit, with $5 million in revenue and $1 million in profit. 3) For a grocery store, a 15% increase in recreation prices would increase food sales by 2.25% due

Uploaded by

eric stevanus
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

ERIC STEVANUS 2201756600 LA28

1. Market Demand.
Gregory House, a Philadelphia-based management consultant, has been asked to
calculate and analyze market demand for a new video game that is to be marketed to
retail (R) and wholesale (W) customers over the Internet. The client estimates fixed
costs of $750000 per year for the product, and that licensing fees and other marginal
costs will be $20 per unit. The client has also provided the following annual demand
information

PR = $62.50-$0.0005QR
PW = $50-$0.002QW

a. Express quantity as a function of price for both retail and wholesale customers. Add
these quantities together to calculate the market demand curve. Graph the retail,
wholesale, and market demand curves for prices ranging from $65 to $35 per unit.
0.0005QR= $62.50-PR
QR=$125000 – 2000PR = Demand function for retail in quantity

0.002QW= $50-Pw
QW= $25000 – 500PW = Demand function for Wholesale in quantity

b. Fill in the following table:

TC = $750,000 + 20Q

Market Daemand is Retail Plus Wholesale Demand

Price ($) Retail Wholesale Market Total Total Total


Demand Demand Demand Revenue Cost Profit

65 - - - - 750.000 -750.000
60 5000 - 5000 300.000 850.000 -550.000
55 15000 - 15000 825.000 1.050.000 -225.000
50 25000 0 25000 1.250.000 1.250.000 0
45 35000 2500 37500 1.687.500 1.500.000 187.500
40 45000 5000 50000 2.000.000 1.750.000 250.000
35 55000 7500 62500 2.187.500 2.000.000 187.500
ERIC STEVANUS 2201756600 LA28
b. Calculate the profit-maximizing price-output combination and total profit?

Profit : =$125000 P – 2000P2 + $25000 P – 500P2 -$750000 -20 ( $125000 – 2000P + $25000 –
500P)
Profit=$150000P-2500P2-$3750000+ 50000P
Profit = $200000P-2500P2- $3750000
Turunkan fungsinya
0 =$200000 – 5000P
P= $40
40 = profit maximizing price output
Total profit = 250.000

2. Revenue Versus Profit Maximization.


The Best Buy Company, Inc., is a leading specialty retailer of consumer electronics,
personal computers, entertainment software, and appliances. The company operates
retail stores and commercial websites, the best known of which is bestbuy.com.
Recently, this site offered a home theater unit with a 5-disc DVD player, MP3 playback,
and digital AM/FM. At a price of $1100, weekly sales totaled 2500 units. After a $100
online rebate was offered, weekly sales jumped to 5000 units. Using these two price-
output combinations, the relevant linear demand and marginal revenue curves can be
estimated as

P = $1200-$0.04Q and MR = $1200 - $0,08Q

a. Calculate the revenue-maximizing price-output combination and revenue level. If


Best Buy's marginal cost per unit is $800, calculate profits at this activity level
assuming
TC = MC X Q.
Revenue maximizing output = $ 1200−$ 0,08 Q=0
Q=1500 0 = Quantity that maximizez Revenue,
P=1200−0.04 × 15000 = 600
Revenue = 15000 x 600 =$9.000.000
Profit at max revenue ¿ 9000000−800 ×15000
= - $3.000.000

b. Calculate the profit-maximizing price-output combination. Also calculate revenues


and profits at the profit-maximizing activity level.

MC=MR
800= 1200 – 0.08Q
ERIC STEVANUS 2201756600 LA28
Q=5000
P= 1200 – 0.04 × 5000 = $1000
Revenue at Profit maximizing activity level = 1000 × 5000
= $5.000.000
Profit ¿ 5000000−800× 5000
= $1.000.000

3. You have just opened a new grocery store. Every item you carry is generic (generic beer,
generic bread, generic chicken, etc.). You recently read an article in the Wall Street
Journal reporting that the price of recreation is expected to increase by 15 percent. How
will this affect your store’s sales of generic food product?

Table 3-1 Selected Cross-Price Elasticities


Cross-Price Elasticity
Transportation and recreation -0.05
Food and recreation 0.15
Clothing and food -0.18

Food and recreation cross-price elasticity is 0.15, which is a positive number. This means
that when price of one of the product rises, the demand for the other product (substitute
product) will increases. So in this case, when price of recreation are expected to increase by 15
percent, means that demand for Food will increase by = 0.15 ×15% = 2,25%.
So, our sales of generic food product will increase for about 2,25%

4. Your firm’s research department has estimated the income elasticity of demand for
nonfed ground beef to be -1.94. You have just read in the Wall Street Journal that due
to an upturn in the economy, consumer incomes are expected to rise by 10 percent over
the next three years. As a manager of a meat-processing plant, how will this forecast
affect your purchases of nonfedcattle?

The income elasticity of demand for our nonfed ground beef is -1.94, which
meanst that when people’s income rises, the demand for our product will decreases or
fall, which means that there are other superior product in the market.So in this case,
when consumer incomes are expected to rise by 10% over the next three years, the
demand for our product are expected to fall by : = −1.94 ×1 0% = -19,4%.
So, we should decrease our purchase of nonfed cattle by 19,4% over the next three
years
ERIC STEVANUS 2201756600 LA28

5. The daily demand for Invigorated PED shoes is estimated to be

QXd = 100 – 3PX + 4PY – 0.01M + 2AX

Where AX represents the amount of advertising spent on shoes (X), PX is the price of
good X, PY is the price of good Y, and M is average income. Suppose good X sells at $25
a pair, good Y sells at $35, the company utilizes 50 units of advertising, and average
consumer income is $20,000. Calculate and interpret the own price, cross-price, and
income elasticity of demand.

QXd= 100- 3(25) + 4(35) – 0.01(20000) +2(50)


= 65 units
Own price elasticity = -3 (25/65) = -1.15
This is the usual demand elasticity, where when price increases, demand for product x
will fall. The nature of this elasticity is elastic, where it’s bigger than 1. Which means,
when price or demand changes, the percentage changes in demand will be Higher than
the percentage changes in price.

Cross Price elasticity = 4 (35/65) = 2.15


This means that product Y is a substitute for Product X. When prices of one of them
increases, the demand for the other product will increase. And the elasticity is quite
elastic, which means that people are very price sensitive, where when one of the price
changes, the percentage of price changes , will be lower than the percentage changes in
demand.

Income elasticity = -0,01 ( 20000/65)= -3.08


This means that Product X is an inferior product, and when incomes rises, demand for
product X will fall. The income elasticity is also elastic, where when people’s income
changes, the percentage of people’s income changes will be lower than the percentage
changes in demand for product X.

You might also like