30 Apr QuestionQ:You are starting your own Internet business
Question
Q:
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 cookbooks
$2,000
Equipment
$4,000
Overhead
$1,000
Part I 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 cookbooks will be $30, and their average cost will be $20.Assume that the equation for demand is Q = 10,000 – 9,000P, 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
Address the following questions:
What is the elasticity of the demand for cookbooks bought this way?
Is the business worth pursuing so far?
Why or why not?
Suppose that you expect to sell about 22,000 cookbooks per month online, and assume your overhead, technology, and equipment costs are fixed. What are your total costs?
What are your marginal costs?
What are the implications of operating in the short run and the long run?
As your business grows, how must you consider the issues regarding diminishing marginal returns and economies of scale?
What market structure have you entered, and why?
What can you do to guarantee success in this market?
Can you use price discrimination in this business?
What pricing strategy might you use?
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