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1. Royersford Knitting Mills, Ltd., sells a line of womens knit underwear. The firm now sells;about 20,000 pairs a year at an average price of $10 each. Fixed costs amount to $60,000, and;total variable costs equal $120,000. The production department has estimated that a 10 percent;increase in output would not affect fixed costs but would reduce average variable cost by 40;cents. The marketing department advocates a price reduction of 5 percent to increase sales;total revenues, and profits. The arc elasticity of demand with respect to prices is estimated at;2.;a. Evaluate the impact of the proposal to cut prices on (i) total revenue, (ii) total cost, and (iii);total profits.;b. If average variable costs are assumed to remain constant over a 10 percent increase in;output, evaluate the effects of the proposed price cut on total profits.;2. The Poster Bed Company believes that its industry can best be classified as monopolistically;competitive. An analysis of the demand for its canopy bed has resulted in the following;estimated demand function for the bed;P = 1760 12Q;The cost analysis department has estimated the total cost function for the poster bed as;TC = 1 Q3 - 15Q2 + 5Q + 24,000;3;a. Calculate the level of output that should be produced to maximize short-run profits.;b. What price should be charged?;c. Compute total profits at this price-output level.;d. Compute the point price elasticity of demand at the profit-maximizing level of output.;e. What level of fixed costs is the firm experiencing on its bed production?;f. What is the impact of a $5,000 increase in the level of fixed costs on the price charged, output;produced, and profit generated?;3. Jordan Enterprises has estimated the contribution margin (P MC)/P for its Air Express;model of basketball shoes to be 40 percent. Based on market research and past experience;Jordan estimates the following relationship between the sales for Air Express and;advertising/promotional outlays;ADVERTISING/PROMOTIONAL;OUTLAYS;SALES REVENUE;$500,000;$4,000,000;600,000;4,500,000;700,000;4,900,000;800,000;5,200,000;900,000;5,450,000;1,000,000;5,600,000;a. What is the marginal revenue from an additional dollar spent on advertising if the firm is;currently spending $1,000,000 on advertising?;b. What level of advertising would you recommend to Jordans management?;4. If notorious firm behavior (i.e., defrauding a buyer of high-priced experience goods by;delivering low quality) becomes known throughout the marketplace only with a lag of three;periods, profits on high-quality transactions remain the same, and interest rates rise slightly, are;customers more likely or less likely to agree to pay high prices for an experience good? Explain.


Paper#15036 | Written in 18-Jul-2015

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