Elasticity of demand

FratBro23
Category:
Other
Price: $5 USD

Question description

You are starting your own Internet business. You decide to form a company
that will sell cookbooks online. Justcookbooks.com is scheduled to launch 6
months from today. You estimate that the annual cost of this business will be as
follows:




Technology (Web design and maintenance)


$5,000


Postage and handling


$1,000


Miscellaneous


$3,000


Inventory of cookbooks


$2,000


Equipment


$4,000


Overhead


$1,000



Part I


Deliverable Length: 1 graph plus calculations


You must give up your full-time job, which paid $50,000 per year, and you
worked part-time for half of the year.


The average retail price of the cookbooks will be $30, and their average cost
will be $20.


Assume that the equation for demand is Q = 40,000 – 500P, where



Q = the number of cookbooks sold per month


P = the retail price of books.


Show what the demand curve would look like if you sold the books between
$25 and $35.

Address the following questions:



  1. What is the elasticity of the demand for cookbooks bought this way?

  2. Is the business worth pursuing so far?

  3. Suppose that you expect to sell about 22,000 cookbooks per month online, and
    assume your overhead, technology, and equipment costs are fixed. What are your
    total costs?

  4. What are your marginal costs?

  5. What market structure have you entered, and why?

  6. What can you do to guarantee success in this market?

  7. What pricing strategy might you use?


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