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ECO204_2008_Test_2_solutions

See figure 2 below figure 2 14 eco 204 2008 2009

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Unformatted text preview: What must the new number of commercial hours be for Prestige Data Services to be profitable? Show all calculations. Answer: From the case solution below, the AVC is constant and equal to \$28. Suppose the new commercial hours are X. The change in the contribution from higher commercial prices is: = (1200 28)X (800 28)138 To bring the company into profitability, the increased contribution must be greater than the current net loss of \$21,438 in March 2003. Thus, the new number of commercial hours needed is: = (1200 28)X (800 28)138 > 21,438 (1200 28)X > 21,438 + (800 28)138 X > {21,438 + (800 28)138}/(1200 28) X 109 hours. Hence, as long as the new commercial hours are greater than 109 hours, raising the price to \$1200/hr will make the company profitable. 16 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission (b) (10 points) Suppose Prestige Data Services spends \$7,720 on sales promotion (i.e. advertising). Assuming advertising raises sales of commercial hours...
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