4. Alcoa Aluminum is experiencing a decrease in demand for their aluminum produc

Question

4. Alcoa Aluminum is experiencing a decrease in demand for their aluminum products. They are looking at ways to increase sales and hopefully profits. Alcoa currently sells 65,000 pounds of aluminum a year at an average price of $9 per pound. Fixed costs of producing aluminum are $225,000. Variable costs per pound are $4.75. After consulting with several of the firm’s business analysts the CEO feels they can reduce variable cost by $.50 per pound if they can increase production by 10%. The analysts also feel the arc elasticity of demand for aluminum to be 1.5. A. How much would Alcoa have to reduce the price of aluminum to increase quantity sold by 10%? B. Calculate the firm’s total revenue, total cost and total price before and after the price cut. Did the price cut achieve a result that was beneficial to the business?

Explanation / Answer

a)

b)

The price cut resulted in decrease in profit. So it is not beneficial to the business.

The target increase in quanity sold 10% Elasticity of demand for aluminum 1.5 So the required decrease in price 15% Current price (in$) 9 Less: Required decrease in price 1.35 (ans) So revised price of aluminum (in$) 7.65

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