Scenario 1 (length: as needed) A cupcake store is located in a mall and is the o
ID: 1178885 • Letter: S
Question
Scenario 1 (length: as needed)
A cupcake store is located in a mall and is the only cupcake store in that mall. The demand schedule for cupcakes (per dozen) is given in the table below. If the marginal cost to produce a dozen cupcakes is $4 per unit, how many units should the firm produce?
Price
Quantity Purchased
(Dozen per day)
$12
3
$11
7
$10
12
$9
20
$8
35
$7
60
$6
100
$5
160
$4
250
Scenario 2 (length: as needed)
A restaurant/bar is analyzing its pricing of beer. It has determined that the price elasticity of demand for beer is ?0.8, the cross-price elasticity for wine with respect to the price of beer is ?0.9, the cross-price elasticity for appetizers is 1.4 and the cross-price elasticity for entrees is 2.2. The current average price of a beer at this bar is $4.50 and the restaurant sells 250 pints of beer a night. The price of wine averages $8 a glass and in a typical night 40 glasses of wine are purchased. An appetizer is priced at an average price of $6 and an entree costs $12 on average. The average number of appetizers and entrees sold per night is 70 and 25, respectively. The marginal cost of a pint of beer is $2, an additional glass of wine sold increases costs by $5, an appetizer increases costs by $4 and an entree has a marginal cost of $7. If the restaurant/bar decides to lower the price of beer by $0.50, by how much does the firm
Price
Quantity Purchased
(Dozen per day)
$12
3
$11
7
$10
12
$9
20
$8
35
$7
60
$6
100
$5
160
$4
250
Explanation / Answer
Scenario 2
If the price elasticity of demand for beer is -0.8, the cross price elasticity of wine to the price of beer is 0.9, the cross price elasticity of appetizers is-1.4, and the cross price elasticity of entrees=-2.2.
Quantity purchased
Price
Revenue
Total cost of production
MC
ED
Beer
250
4.5
1125
500
2
-0.8
Wines
40
8
320
200
5
0.9
Appetizer
70
6
420
280
4
-1.4
Entree
25
12
300
175
7
-2.2
Midpoint Formula:
Midpoint price=4.5+4=8.5/2=4.25
Change in price=4-4.5=-0.5
% change in price=0.5/4.25*100=11.8%
x/11.8=-0.8
x=9.4
y-50/y+450/2=9.4
y=243 pints of beer
Price
Quantity Purchased
Revenue
Cost
Beer
4
243
972
486
Wines
8
22
176
110
Appetizer
6
38
228
152
Entree
12
14
168
98
Quantity purchased
Price
Revenue
Total cost of production
MC
ED
Beer
250
4.5
1125
500
2
-0.8
Wines
40
8
320
200
5
0.9
Appetizer
70
6
420
280
4
-1.4
Entree
25
12
300
175
7
-2.2
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