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economics- Ch[1].5

# economics- Ch[1].5 - Managerial Economics 6005 Homework...

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Managerial Economics – 6005 5.1 Market Demand. Michael Kelso, a Wisconsin-based management consultant, has been asked to calculate and analyze market demand for a new video game that is to be marketed to retail (R) and wholesale (W) customers over the Internet. Kelso’s client estimates fixed costs of \$750,000 year for the product, and that licensing fees and other marginal costs will be \$20 per unit. The client has also provided Kelso with the following annual demand information: P R = \$62.50 - \$0.0005Q R P w = \$50 - \$0.002Qw A. Express quantity as a function of price for both retail and wholesale customers. Add these quantities together to calculate the market demand curve. Graph the retail, wholesale, and market demand curves for prices ranging from \$65 to \$35 per unit. For retail customers, P R = \$62.50 - \$0.0005Q R 0.0005Q R = 62.50 – P R Q R = 125,000 - 2000 P R For wholesale customers, P w = \$50 - \$0.002Qw 0.002Qw = 50 - P w Q w = 25,000 – 500 P w For retail plus wholesale customers, the market demand curve can be expressed with quantity as a function of price as: Q = Q R + Qw = 125,000 - 2000 P R + 25,000 – 500 P w = 150,000 – 2500 P The price must be expressed as a function of quantity, Q = 150,000 – 2500 P 2500 P = 150,000 – Q P = 60 – 0.0004 Q To graph the retail, wholesale, and market demand curves for prices ranging from \$65 to \$35 per unit TC = \$750,000 + 20Q

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Managerial Economics – 6005 B. Fill in the following table: Price Retail Demand Wholesale Demand Market Demand Total Revenue Total Cost Total Profit \$65 -5,000 -7,500 -12,500 -812,500 500,000 -1,312,500 \$60 5,000 -5,000 0 0 750,000 -750,000 \$55 15,000 -2,500 12,500 687,500 1,000,00 0 -312,500 \$50 25,000 0 25,000 1,250,00 0 1,250,00 0 0 \$45 35,000 2,500 37,500 1,687,50 0 1,500,00 0 168,750 \$40 45,000 5,000 50,000 2,000,00 0 1,750,00 0 250,000 \$35 55,000 7,500 62,500 2,187,500 2,000,00 0 187,500 C. What price/output combination will maximize total profits? The profit-maximizing output level can be seen as 50,000 units, where 45,000 units
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economics- Ch[1].5 - Managerial Economics 6005 Homework...

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