Elaine makes delicious cupcakes that she mails to customers across the country.

Question

Elaine makes delicious cupcakes that she mails to customers across the country. Her cupcakes are so delicious that she has a great degree of pricing power. Her customers have identical demands for cupcakes. A representative customer's demand is shown in the diagram below. Elaine can make a cupcake for a constant marginal and average total cost of $0.50.

Suppose that Elaine decides to offer a quantity discount according to the following terms: the first 10 cupcakes can be bought for $1.50 each; any cupcake over 10 will be offered at a discount price. How many cupcakes will each customer order at the discounted price? How much do Elaine's profits increase?

Suppose that Elaine decides to offer a quantity discount according to the following terms: the first 10 cupcakes can be bought for $1.50 each; any cupcake over 10 will be offered at a discount price. How many cupcakes will each customer order at the discounted price? How much do Elaine's profits increase?

5 additional cupcakes; profit increases by $2.50 5 additional cupcakes; profit increases by $5.00 5 additional cupcakes; profit increases by $1.25 10 additional cupcakes; profit increases by $5.00

Explanation / Answer

ATC=0.50

MC= 0.50/20=0.025

TR= 15

further 5 cupcakes=

:Profit = 2.50

Equilibrium at MC=MR

MR= 0.025

TR= 50 +0.025x5-0.025x15= 2.50x * X

Where x= no. of cups49.750=3.50x= 14.2(approx)

If profit is 2.50, cups =15

if profit is 5.00, cups =30

if profit =1.25, cups= 8

If profit=5.00 and cups additional 10, then cups= 25

By,

Nishant Bhatt

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