A. The price elasticity of toy cars that you sell is-4.00; you currently charge
ID: 1151420 • Letter: A
Question
A. The price elasticity of toy cars that you sell is-4.00; you currently charge a price of S5.00 and marginal cost of toy cars is $3.00 Q1. Calculate the marginal revenue from the given information. and decide whether you should increase output (sell more). Q2. Based on the answer in the previous question, decide whether you should increase your output or decrease it. Q3. Do you need to increase the price or decrease the price? 04. Using the above information, you should be able to find the price that will maximize your profits. B. A domestic shoe company distributes running shoes and tennis shoes for S95 per pair to it domestic shoe retailers. The marginal cost of producing a pair of running shoes is $60 and the marginal cost of producing a pair of tennis shoes is $45. Ignore any potential issues of bundling the two types of shoes together as part of the sale and any competitive effects that international sales might have on current domestic sales. A Chinese retailer offers to purchase running shoes for $55 per pair and tennis shoes for $55 per pair, for distribution in China. Q5. Is the marginal revenue from selling running shoes to the Chinese retailer greater or less than its marginal cost? Q6. Should the shoe company sell running shoes to the Chinese retailer? Q7. Is the marginal revenue from selling tennis shoes to the Chinese retailer greater or less than its marginal cost? Q8. Should the chose company sell tennis shoes to the Chinese retailer? Q9. Suppose the domestic shoe company has a maximum capacity of 50,000 pairs of running shoes and 50,000 pairs of tennis shoes in total, of which 45,000 pairs of running shoes and 45,000 pairs of tennis shoes can be sold to domestic retailers. How would you allocate the supply of shoes if the Chinese retailer offers to purchase 15,000 of running shoes and 15,000 pairs of tennis shoes? Running Shoes Tennis Shoes Domestic Retailers Chinese Retailers C. A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers and output increased by 100,000 pages per day. One month ago, they added 5 workers and productivity also increased by 50,000 pages per day. Copiers cost about twice as much as workers Q10. What is the output of pages per work Q11. What is the output of pages per copier machine? Q12. Would you recommend they hire another employee or buy another copier? Q13. You have to justify your answer in for the previous question. er?Explanation / Answer
(A)
(Q1) Marginal revenue (MR) = Price x [1 - (1/E)] where E: Absolute value of elasticity of demand
= $5 x [1 - (1/4)]
= $5 x (3/4)
= $3.75
(Q2) Profit is maximized (or loss is minimized) when MR equals MC. Since in this case MR is higher than MC, there is a marginal profit which can be increased by increasing output until MR equals MC.
(Q3) According to law of demand, in order to increase output, price has to be decreased.
(Q4) Lerner Index (LI) = -1 / Elasticity of demand = (P - MC) / P [Where P: Price, MC: Marginal cost]
LI = -1 / -4 = 1/4
1/4 = (P - 3) / P
P = 4P - 12
3P = 12
P = $4 (Profit-maximizing price)
NOTE: As per Chegg Answering Policy, 1st question is answered.
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