REQUEST: Please answer the first three (3) questions of Part II. You are startin
ID: 1238353 • Letter: R
Question
REQUEST: Please answer the first three (3) questions of Part II.
You are starting your own Internet business. You decide to form a company that will sell cookbooks online. Justcookbooks.com is scheduled to launch 6 months from today. You estimate that the annual cost of this business will be as follows:
Technology (Web design and maintenance) $5,000
Postage and handling $1,000
Miscellaneous $3,000
Inventory of cook books $2,000
Equipment $4,000
Overhead $1,000
Technology (Web design and maintenance): $5,000
Part I
Requirement: 1 graph plus calculations
You must give up your full-time job, which paid $50,000 per year, and you worked part-time for half of the year.
The average retail price of the cookbook will be $30, and the average cost will be $20.
Assume that the equation for demand is Q = 10,000 - 90P, where
Q = the number of cookbooks sold per month
P = the retail price of books.
Show what the demand curve would look like if you sold the books between $25 and $35.
Part II
REQUEST: Please answer the first three (3) questions of Part II.
OBJECTIVE: Please address the following questions thoughtfully and when your answer, claim or conclusion should be justified with numbers, please show how you calculated the numbers.
1. What is the elasticity of the demand for cookbooks bought this way?
2. Is the business worth pursuing so far? Why or why not?
3. Suppose that you expect to sell about 22,000 cookbooks per month online, and assume that your overhead, technology, and equipment costs are fixed. (a) What are your total costs? (b) What are your marginal costs?
4. What are the implications of operating in the short run and the long run?
5. As your business grows, how must you consider the issues regarding diminishing marginal returns and economies of scale?
6. What market structure have you entered, and why?
7. What can you do to guarantee success in this market?
8. Can you use price discrimination in this business?
9. What pricing strategy are you thinking about?
10. Is the business worth pursuing so far? Why or why not?
Explanation / Answer
II 1) When we increase the price from $20 to $30, we increase it 50%. (Note that if we decrease it from $30 to $20, we decrease it by 33% so the elesticity numbers can have some variation) The number of books sold goes down from (10,000 - 90*20) to (10,000 - 90*30) In percent this is 100*(8200 - 7300)/8200 = 11% So the elasticity of demand is between -2.7 and -4.55 depending on how you do the percents. I would say -4.55 (can leave out the negative sign since it is almost always understood). In any case, Elasticity of demand says we should increase the price. We could use these big intervals since the demand curve is linear. 2) Yes, you are making way more than you did at your old job. Even if you only charge $25, you predict a net of $38,750 per month 3) 22,000 is more than our demand equation predicts, so something must have changed. The fixed costs (from Part I) are $5,500 per month (including lost pay from your current job) The books cost $20*22,000 = $440,000 Together your total monthly costs are $445,500 Marginal costs: To sell one more book, you only need to buy one more book, so for each addition book you get $30 and spend $20 The marginal cost is $20 per book. The marginal cost doesn't vary with number since all other costs besides the actual price of the book are fixed.
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