12 May IS STS MAXIMIZING ITS REVENUE?
SaveUmoney Tax Services (STS) is a small operation that offers tax services to individuals and small businesses. A local marketing consultant has estimated the weekly demand for STS’s services as follows: Q = 1200 – 6 P + 25 A where: Q = the number of tax returns prepared per week P= price A= advertisement (the number newspaper ads) Presently STS charges (on average) $50 per tax return and each week places 12 ads in a local newspaper. Each newspaper ad costs $150. a. How many tax returns does STS prepare each week? b. What is the price elasticity of demand at the price of $55, assuming the number of ads remains the same (at ten)? c. What is the elasticity of demand with respect to advertisements? d. At what price level does the demand curve intercept the price axis? e. At what quantity level does the demand curve intercept the quantity axis? f. Is STS maximizing its revenue? Explain? g. The marketing consultant recommends that STS increase the number of its ads to 25 ads per week and (to pay for the additional ads) raise its price. Do you agree with this recommendation? Explain. h. Assuming STS’s objective is to maximize its total revenue, what price should it charge after it has increased the number of its newspaper ads to 40 ads per week? i. Now suppose the firm’s total and marginal cost are as follows: TC = 6500 + 20 Q (The cost function includes advertising costs.) MC = 20 Assuming the number of ads remains at 25, what price should STS charge to maximize its profit? j. Calculate STS’s profit at this price.
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