Robert's New way, economics homework help

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Economics

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Problem 1:  Robert’s New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2. 

Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.

  1. What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.
  2. How much economic profit do you expect that Robert’s company will make in the first year?
  3. Do you expect this economic profit level to continue in subsequent years? Why or why not?

Problem 2: 

Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC’s price for the typical lawn system was $1,900 compared with BLG’s price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.) 

GGC has substantial excess capacity–it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed several hundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows: 

Qw =2100 – 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw 

for the western market and 

Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye 

for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC’s cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems. 

Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.
  1. Derive the demand curves for GGC’s product in each market.
  2. Derive GGC’s marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGC’s demand, MR, and MC curves for each market.
  3. Derive algebraically the quantities that should be produced and sold, and the prices that should be charged, in each market.
  4. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to be charged in each market.
  5. Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendations.

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Explanation & Answer

Attached.

Running head: SOLUTION TO ECONOMIC ASSIGNMENT MARKET STRUCTURES
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AND PRICING DECISIONS

BUS 640 Week 4 Assignment Market Structures and Pricing Decisions

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SOLUTION TO ECONOMIC ASSIGNMENT MARKET STRUCTURES AND PRICING DECISIONS

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Problem 1
1. Answer
To calculate the profit-maximizing price and quantity for the market we first determine the
equation of MR curve. Recall that for downward sloping demand curve the Marginal revenue has
equal y-intercept value with double value of gradient
Therefore MR = 5000 – 50Q.
MC = differentiation of the TC curve, MC = 20 +0.04Q
Equate MR = MC to get the value of profit maximizing quantity
5000 – 50Q = 20 + 0.04Q thus Q = 99.52 units
Profit maximizing price is obtained from demand curve equation
99.52 = 5000 – 25P
Profit maximizing Price = $196 per unit
Profit maximizing Quantity = 99.52 units
2. Answer.
Profit = TR – TC = ($196 x 99.52) – (1500 + (20 x 99.52) + (O.02 X 99.522))
Profit = $ 15817.44
3. Answer

SOLUTION TO ECONOMIC ASSIGNMENT MARKET STRUCTURES AND PRICING DECISIONS

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No, it will not. This is due to the facts that the monopoly we have the consumers who are very
naïve to purchase a product which has the same cost or cheaper from the next competitor.
Another hurdle will be the cost of legal fees and in court, in case it will need put in place its
patent therefore spoiling the paten...


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Great study resource, helped me a lot.

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