Bus640 Week 4

Market Structures and Pricing Decisions Applied Problems

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BUS 640: Managerial Economics

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Problem 1: 

Robert’s New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2.

1A: What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.

As we see from above, the demand function is Q = 5000 – 25P. That would make the inverse function P = 200 – 0.04Q. TR = (P) (Q) which equates to 200Q – 0.04Q2. MR = 200 – 0.08Q. TC = 1500 + 20Q + 0.02Q2. MC = 20 + 0.04Q. As we seen from previous reading, the profit will be maximized when MR = MC. To make this into a simple equation we get 200 – 0.08Q = 20 + 0.04Q = 0.12Q = 180 = Q = 180 / 0.12 = 1500. Since P = 200 – 4Q = 200 – (0.04 x 1500) = 200 – (60) = 140. This means the profit-maximizing price is set at $140 and their quantity comes out to 1500 vacuum cleaners.

1B. How much economic profit do you expect that Robert’s company will make in the first year?

The Profit = TR – TC = 210,000 – 76,500 = 133,500. The $133,500 will be the profit from the first year.

1C. Do you expect this economic profit level to continue in subsequent years? Why or why not?

Problem 2: 

Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC’s price for the typical lawn system was...