Johnny Rockabilly has just finished recording his latest CD. His record company\
ID: 1253139 • Letter: J
Question
Johnny Rockabilly has just finished recording his latest CD. His record company's marketing department determines that the demand for the CD is as follows: The company can produce the CD with no fixed cost and a variable cost of $5 per CD. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold? What quantity of CDs would maximize profit? What would the price be? What would the profit be? If you were Johnny's agent, what recording fee would you advise Johnny to demand from the record company? Why?Explanation / Answer
a) Find total revenue for quantity equal to: 10,000: Revenue=Price*Quantity Revenue=10,000*$24=$240,000 20,000: 20,000*$22=$440,000 30,000: 30,000*$20=$600,000 40,000: 40,000*$18=$720,000 50,000: 50,000*$16=$800,000 60,000: 60,000*$14=$840,000 Marginal Revenue at: 20,000: Revenue @ 20,000-Revenue @ 10,000=Marginal Revenue $440,000-$240,000=$200,000 30,000: $600,000-$440,000=$160,000 40,000: $720,000-$600,000=$120,000 50,000: $800,000-$720,000=$80,000 60,000: $840,000-$800,000=$40,000 b) Find profit at each price level. Profit=Revenue-Cost. We have already found Revenue at each level, so we will find Cost, then profit. 10,000: Cost=10,000*$5=$50,000 20,000: Cost=20,000*$5=$100,000 30,000: Cost=30,000*$5=$150,000 40,000: Cost=40,000*$5=$200,000 50,000: Cost=50,000*$5=$250,000 60,000: Cost=60,000*$5=$300,000 10,000: Profit=Revenue-Cost Profit=$240,000-$50,000=$190,000 20,000: Profit=$440,000-$100,000=$340,000 30,000: Profit=$600,000-$150,000=$450,000 40,000: Profit=$720,000-$200,000=$520,000 50,000: Profit=$800,000-$250,000=$550,000 60,000: Profit=-$840,000-$300,000=$540,000 The quantity of CD's that would maximize profit is 50,000 CD's. The price at 50,000 is $16. The profit is $550,000. c) If I were Johnny's agent, I would advise him to demand $549,999 from the record company. Since they have no fixed costs, they can cover all their variable costs and still have $1 left over. $1 is better than $0 if they reject his offer, so they should accept Johnny's offer.
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