Busniesss

Scenario Analysis

Learning Team C

Kevin Brown

Joda Johnson

Donsha Lewis

Amanda Mateo

Jamie Pflugfelder

Rance Krech

University of Phoenix

ECO/561 Economics

Rodolfo R. Rivas Ph.D.

May 2, 2011

Scenario Analysis

The purpose of this assignment is to examine the Will Bury’s Price Scenario and examine relevant concepts pertaining to cost concept and profit maximization. This paper will reflect on the effect of revenue when there is a change in price, assuming that the competitors do not change their prices. This paper will also estimate the effect of elasticity of demand, using the base estimate on the number and closeness of substitutes. Last, this paper will justify Team C’s estimate of elasticity of demand.

Price Effect on Revenue

“When an economist says a certain firm is earning only enough revenue to cover its costs, this means it is meeting all explicit and implicit costs and the entrepreneur is receiving a payment just large enough to retain his or her talents in the present line of production” (Brue, Flynn, & McConnell, 2009, p. 156). Basically, an entrepreneur receives all residual when total revenue exceeds all economic costs. Will’s current price of $10 per title with no copyright and $15 per title with royalties has profited approximately $ 30,000 after royalty fees. Currently, he is the only one in the business and has been scanning all titles himself. This process takes about an hour for every 500 pages. If Will decides to increase his price per title, there will be an increase in sales as long as the demand for newer titles stays either the same or increases. If the demand increases Will may need to think about hiring an employee to help out. Marginal decisions are a firm’s decision of an output level to produce. Marginal cost occurs when one more or one less, unit of an output is produced and there is a change in cost....