204_summer_2009_lecture_10

204_summer_2009_lecture_10 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 10 1 Ajaz Hussain. Department of Economics Sayed Ajaz Hussain. For use in ECO 204 only Prestige Telephone Company “Inter company” Billing @ $400/hr. Prestige Telephone Company Prestige Data Services Commercial Companies Billing @ $800/hr “Commercial” Other ervices 2 R capped at $82,000/month → Q = 205 hours Synopsis ¡ PTC currently incurring losses ¡ Evaluate different proposals for profitability: ¢ Bill more commercial hours ¢ Breakeven commercial hours? ¢ Raise commercial prices ¢ Lower commercial prices ¢ Increase advertising ¢ Reduce operations Sayed Ajaz Hussain. For use in ECO 204 only 3 Breakeven Hours for Single Division ¡ ∏ = R – C ¢ → ∏ = PQ – TVC – TFC ¢ → ∏ = PQ – (AVC)Q – TFC ¢ → ∏ = (P – AVC)Q – TFC ¢ → ∏ = (P – AVC)Q – TFC ¡ Break even profits when ∏ = 0 ¢ ∏ = (P – AVC)Q – TFC = 0 ¢ → Breakeven Q = TFC/(P – AVC) Sayed Ajaz Hussain. For use in ECO 204 only 4 AVC = TVC/Q → TVC = AVC*Q “contribution margin” Interpret Interpret Breakeven Hours for Two Divisions ¡ ∏ = ∏ i + ∏ c ¢ → ∏ = R i + R c ‐ TVC i ‐ TVC c ‐ TFC ¢ → ∏ = P i Q i + P c Q c ‐ AVC i Q i ‐ AVC c Q c – TFC ¢ → ∏ = (P i ‐ AVC i )Q i + (P c ‐ AVC c )Q c – TFC ¡ Break even profits when ∏ = 0 ¢ ∏ = (P i ‐ AVC i )Q i + (P c ‐ AVC c )Q c – TFC = 0 ¢ → Breakeven Q c = {TFC ‐ (P i ‐ AVC i )Q i }/(P c ‐ AVC c ) ¢ Contrast with single division case – insights? ¢ Implication of other division profitable? Unprofitable?...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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204_summer_2009_lecture_10 - University of Toronto...

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