2009PS_5_Solutions - AEM 4150 Price Analysis Fall Semester...

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AEM 4150 Price Analysis Fall Semester 2009 Homework Assignment 5 Suggested Solutions Problem 1 (a) (2 points) PROM = 30,000,000 INC = 38,000 The demand equation becomes Qd = 60 – 0.30P + 0.004(38,000) + 0.0000008(30,000,000) Qd= 60 – 0.3P + 152 + 24 Qd= 236 – 0.30P In equilibrium, Qd* = Qs*, hence 236 – 0.3P = 5P P* = 44.53 Q* = 5 (44.53) (10,000), or Q* = 2,226,500 Total Revenue (TR) = P*Q*= 99,146,045 TR – Promotion Costs = 99,146,045 – 30,000,000= 69,146,045 (b) (2 points) Similarly, PROM = 0 INC = 38,000 The demand equation becomes: Qd = 60 – 0.30P + 0.004(38,000) + 0 Qd = 60 – 0.30P + 152 Qd= 212 – 0.30P In equilibrium, Qd* = Qs* hence 212 – 0.30P = 5P P* = 40 Q* = 5 (40) (10,000)= 2,000,000 Total Revenue (TR) = P*Q*= 80,000,000 TR – Promotion Costs = 80,000,000 – 0 = 80,000,000 1
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Thus in this case, corn farmers should not continue this program because TR without promotion is greater than TR with promotion. (c) (2 points)
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This note was uploaded on 08/30/2010 for the course AEM 4150 at Cornell University (Engineering School).

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2009PS_5_Solutions - AEM 4150 Price Analysis Fall Semester...

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