9. Critical analysis Q17 Rod N. Reel owns a dealership that sells fishing boats
ID: 1117486 • Letter: 9
Question
9. Critical analysis Q17 Rod N. Reel owns a dealership that sells fishing boats in an open, price-searcher market. To develop his pricing strategy, Rod hired an economist to estimate his demand curve. The first two columns of the chart provide the data for the expected weekly quantity demanded for Rod's fishing boats at alternative prices. Rod's marginal (and average) cost of supplying each boat is constant at $500 per boat, no matter how many boats he sells per week in this range. This cost includes all opportunity costs and represents the economic cost per boat Complete the following table by finding the total revenue and total cost per week at each quantity, the marginal revenue and marginal cost from the sale of each additional boat, and the economic profit per week at each quantity Fishing Boats Sold (Boats per Week) $per Week) (per Week) Total Revenue Marginal Revenue Marginal Cost Economic Profit Total Cost Price of Fishing Boats $ per Week) ($per Week) ($ per Week) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $0 $0 $0 $500 $500 $500 $500 $500 3 $ 4 5 $ If Rod wants to maximize his profits, he should charge a price of profit-maximizing price per boat. At this price, Rod will sell boats per week at the At this price and sales volume, Rod's profits per week will be $Explanation / Answer
Answer:
P ($)
Fishing boats
TR ($)
MR ($)
TC ($)
MC ($)
EP ($)
8000
0
0
0
0
7000
1
7000
7000
500
500
6500
6000
2
12000
5000
1000
500
11000
5000
3
15000
3000
1500
500
13500
4000
4
16000
1000
2000
500
14000
3000
5
15000
-1000
2500
500
12500
All costs are in $
Economic profit = TR - TC
MC (nth unit) = TC (n units) - TC ((n-1) units)
TR = P x Q
MR (nth unit) = TR (n units) - TR ((n-1) units)
If Rod wants to maximize his profits, he should charge a price of $4000 (price charged at quantity where MR>=MC). At this price, Rod will sell 4 boats per week at the profit maximizing price.
Profit = $14000 per week
The statement is true (MR>= MC for maximizing profit)
These profits will induce firms to enter the industry until economic profits are eliminated.
As Rod lowers his price from $8000 to $4000 his total revenues keep increasing. Thus, demand is elastic over this range of prices.
When Rod lowers his price from $4000 to $3000, his total revenues decrease. Thus, demand is inelastic between these two prices.
P ($)
Fishing boats
TR ($)
MR ($)
TC ($)
MC ($)
EP ($)
8000
0
0
0
0
7000
1
7000
7000
500
500
6500
6000
2
12000
5000
1000
500
11000
5000
3
15000
3000
1500
500
13500
4000
4
16000
1000
2000
500
14000
3000
5
15000
-1000
2500
500
12500
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