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Managerial Economics Essay

3279 words - 14 pages

Major Assignment
1) a) Demand Function: Quantity Demanded (Qd) = a + b* Price (P)
Supply Function: Quantity Supplied (Qs) = a + b* Price (P)

a = constant
b = the change in quantity as a result to the change in price.

Demand Function: Quantity Demanded (Qd) = a + b* Price (P)
b = (420 – 350) / (20 – 25)
= 70 / -5 = -14

Using: P = 25, Qd = 350
350 = a – 14 * (25)
350 = a – 350
Therefore a = 700 and the demand function would be: Qd = 700 – 14 * P

Supply Function: Quantity Supplied (Qs) = a + b* Price (P)
b = (350 – 420) / (20 – 25)
= -70 / -5 = 14

Using: P = 25, Qs = 420
420 = a + 14 * (25)
420 = a + 350
420 – 350 = a
Therefore a = 70 and ...view middle of the document...

In other words, total revenue is maximized when marginal revenue is 0 and falling. Selling an extra unit would lead to negative Marginal Revenue, hence Total Revenue (TR) falls. Had you been selling one less unit, the next unit would still have positive MR. Hence TR maximization is where MR=0. Price Elasticity of demand is % change in demand / % change in price. When MR=0, the + % change in demand as you sell more is exactly matched by the - % change in price as you need to cut price, hence price elasticity = 1.

2) Live Long
a) Q = 1000 – 10P
1000 = constant
10 = rate of change of demand based on price or price coefficient i.e. very elastic

If P = $79.99 then:
Q = 1000 – 10 (79.99)
Q = 1000 – 799.9
Q = 200.1 units sold based on selling price.

Therefore with approximately 200 units sold @ a cost of $40 per unit, this will give a production cost of $8,000.
Total Revenue = $79.99 * 200 units = $15,998
Profit = $15,998 - $8,000 = $7,998.

b) It should be noted that Live Long is operating where there is a very elastic demand. This means that quantity demanded is very responsive to changes in the price. It is most likely the case that it is a very competitive environment. When price elasticity of demand is elastic, the firm should lower prices, since it will result in an increase in demand, increasing your total revenue. 

The price coefficient from the function given indicates a 10 unit quantity demand increase of every $1 decrease in the price offered and vice versa as demonstrated below:

If P = $78.99 then:
Q = 1000 – 10 (78.99)
Q = 1000 – 789.9
Q = 210.1 units
Production Cost = $40 * 210 units = $8400
Total Revenue = $78.99 * 210 units = $16,587.90
Profit = $16,587.90 - $8,400 = $8,187.90.

Therefore for Live Long to “make more profit” it should lower its selling price.

3) a) If the competitors prices were reduced this would have the effect of increasing your prices and an as a result of this demand has also increased. This is not the normal convention in the relationship between price and demand, it is quite the opposite. One can assume that your good maybe a Veblen good, where demand rises as price rises. The logic behind it is that because people think more expensive goods are better quality, and so people buy more. Studies suggest people do get more satisfaction from receiving expensive goods. This is often termed the snob effect – people equate price to quantity. It may be the case that your appliances could be considered luxury goods and are of better quality consisting of high-end brands.
Another explanation following from above could be assuming that the goods are luxury goods; there could have been an increase in income causing an increase in demand. For example, high Definition TV’s would be luxury. When income rises, people spend a higher % of their income...

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