uestion Make sure you show ALL your work and explain where asked.

04 Jun uestion Make sure you show ALL your work and explain where asked.

uestion
Make sure you show ALL your work and explain where asked. Groups who do not provide explanations or simply provide final answers will not receive credit for that question. See the assignment handout for more information. Groups should answer the following questions:
1. (20 points) Chefs Catalog sells its basic food processor for $300. The company’s experience indicates that sales volume is affected by changes in consumer income as well as the price of the product. Specifically, the market research department estimates that the arc price elasticity of demand is -9 and the income elasticity is +4. These relations are expected to remain stable in the near future over the contemplated range of prices and incomes. Last year Chefs Catalog sold 100,000 units and disposable income was $37,500.

a. Using the arc elasticity formula, and holding all else equal, estimate the impact on sales of a rise in disposable income from $37,500 to $42,500.

b. Using the arc elasticity formula, and holding all else equal, estimate the impact on quantity demanded of a $50 reduction in price.

2. (20 points) Emerson Industries, Inc. is based in Vermont and specializes in making replacement parts for aircraft. The firm has determined the following demand and cost relations:

P = 155 – 0.05Q

MR = dTR/dQ = 155 – 0.1Q

TC = 75000 + 5Q + 0.0125Q2

MC = dTC/dQ = 5 + 0.025Q

a. Calculate the revenue maximizing price and output combination. Show ALL work.

b. Calculate the profit-maximizing price and output combination. Show all work.

c. Explain the differences in your answers to parts A and B. Why do the prices and output values differ?

3. (15 points) The market for oil tends to be very volatile. Indicate the impact of each of the following on the demand and supply for oil. Be sure to indicate which curve(s) have shifted and explain your answer thoroughly:

a. A $5 per barrel tax on oil imposed by the US government.

b. An improvement in oil recovery technology (this allows more oil to be produced from each field).

c. An unusually hot summer which results in an increase in the demand for air conditioning in homes as well as in cars.

d. An increase in energy conservation.

e. Items B and D happen at the same time.

4. (20 points) Amazing Foods Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Amazing’s various outlets, it was found that the demand curve follows this pattern:

Q = 200 – 300P + 120Y + 65T – 250AC + 400AJ

Where: Q = number of cups served per week

P = average price paid per cup

Y = per capita income in the given market (in thousand $)

T = average outdoor temperature

AC = Competition’s monthly advertising expenditures (in thousand $)

AJ = Amazing’s own monthly advertising expenditures (in thousand $)

One of the outlets has the following conditions:

P = $1.50; Y= $10,000; T = 60; AC = $15,000; AJ = $10,000

a. Estimate the number of cups served per week by this outlet. Also determine the equation for the outlet’s demand curve. Hint: Be very careful of units! If something is measured in millions, then $10,000,000 = 10 units in the equation, for example.

b. What would be the effect of a $5,000 increase in the competitor’s advertising expenditure? Determine the new demand curve and explain what has occurred.

c. What would Amazing’s advertising expenditure have to be to counteract this effect? Show all calculations and explain briefly.

d. Determine elasticities for every single variable in the equation (ignore the constant). Interpret your answers (say what the elasticity means).

5. (20 points) Oscar owns a chain of fitness studios. He is trying to determine the level of output she needs to achieve maximum profit. He has gathered the following information regarding output, price of annual memberships, and costs. Use the table to answer the following questions:

Output

Price

Total Costs

0

$ 1000

$ 500

1

$ 960

$ 740

2

$ 920

$ 980

3

$ 880

$ 1220

4

$ 840

$ 1460

5

$ 800

$ 1700

6

$ 760

$ 1940

7

$ 720

$ 2180

8

$ 680

$ 2420

9

$ 640

$ 2660

10

$ 600

$ 2900

11

$ 560

$ 3140

12

$ 520

$ 3380

13

$ 480

$ 3620

14

$ 440

$ 3860

15

$ 400

$ 4100

a. Construct a table showing total revenue, marginal revenue, marginal cost, average cost, total profit, marginal profit, and average profit for all output levels. Be sure to show all work – you can either include an appendix with an Excel spreadsheet that shows calculations made or show several sample calculations for each item. Do not just give me formulas. I need to see exactly how you derived figures.

b. Identify the profit maximizing output level.

c. Identify the output level which minimizes average costs. Is the profit-maximizing output level the same as the one at which marginal average cost is minimized? Why or why not?

6. (5 points) You have the choice of opening your own business or being employed by someone else in a similar type of business. What are some of the considerations in terms of opportunity costs that you would have to include in arriving at your decision?