SECTION 6 stores like Target often use low in the store, parents priced diapers
ID: 1164606 • Letter: S
Question
SECTION 6 stores like Target often use low in the store, parents priced diapers a way of increasing foot traffic through their stores. The idea is that roy will purchase other items at full price. suppose that Target's marginal cost of a standard package of diapers is $25 and their fiuxed cost is $0. The monthly inverse demand for a package of diapers is described by: Pa54-BQ. Futhermore, assume that each timea Target. customer buys a package of diapers, they spend an additional $80 in store and this spending generates $35 in protit for 15. Calculate the marginal revenue in the diaper market 16. Given the profits generated from additional purchases, determine Target's updated (or true package of diapers? 17. Given what was determined in (15) and (16), calculate the profit maximizing quantity and price of diapers for Target. 18. Are diapers a loss leader? How do you know?Explanation / Answer
15. Marginal revenue = d(total revenue TR) / dQ
Where total revenue = P*Q + 80Q ( as on purchase of per diaper consumer spend 80 more so we add 80Q in the total revenue).
TR = (54 - 8Q)*Q + 80Q = 54Q - 8Q2 + 80Q
MR = 54 - 16Q + 80 = 134 - 16Q
16. Marginal cost = $25 of diaper,
Additional profit is $35, at the marginal or additional revenue of $80.
It means the additional cost is 80 - 35 = 45
So total marginal cost or true marginal cost is 25 + 45 = $70.
17. To find profit maximizing quantity and price, we put MR = MC
134 - 16Q = 70
64 = 16Q
Q = 4 ---- Profit maximizing quantity
At Q = 4, price will be
P = 54 - 8*4 = $22 --- profit maximizing price.
18. To find if the diaper is a loss leader or not we will find the averge cost of diaper and if the firm.is charging less than average cost i.e., if the price of diaper ($22) is less than average cost of diaper it means it is a loss leader.
To find averge cost we first find total cost,
Given that the marginal cost is $25, it means the variable cost is Integration of 25 is variable cost
So variable cost is 25Q
It is also given that fixed cost is 0. So variable cost is total cost. It means
Total cost = 25Q
Average cost = 25Q/Q = $25.
So average cost of diaper is 25 but the price charged by Target for per diaper is $22 which is less than $25 so it is a loss leader.
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