Wonderful Wearables is a personal technology company that has stylish accessorie

Question

Wonderful Wearables is a personal technology company that has stylish accessories that deliver apps of all kinds. Its current Marginal Cost (MC), Average Cost (AC), and Demand curves are indicated below by the the curves labeled with the number 1. Millennial Marketing believes that with right advertising campaign Wonderful Wearables can increase both its demand and reduce the elasticity of demand for its products thus increasing its overall profit. The estimated increase in both costs and demand are depicted below by the curves labeled with the number 2.

Part 1: Use the infinite line drawing tool to draw the marginal revenue curve (MR) for Wonderful Wearables both before and after Millennial's ad campaign and label them with a 1 before the campaign and a 2 afterwards.

Part 2: Use a double drop line tool to show where the firm will produce and what price it will charge with and without advertising. Label these profit maximizing Prices and Quantities appropriately (PQ1 & PQ2).

Part 3: Use a horizontal line tool to show the firm's Average Costs at both levels of production: Q*1 (without advertising) and Q*2 (with advertising), and label them accordingly.

Part 4: Use the quadrilateral tool to identify the amount of profit or loss this firm will experience both with and without advertising and label them appropriately.

Hint: Work through the case without advertising first with snapping switched on and then work through the case with advertising with snapping switched off.

Coordinates: (0.00, 0.00) o 150 140 130 120 110 100 Demand 1 Demand 2 -Marg Revenue 1 -Marg Revenue 2 -Avg Cost Curv1 -Avg Cost Curv2 2 -Marg Cost 1 Marg Cost 2 -Profit Max PQI -Profit Max PQ2 -Avg Cost Q* 1 -Avg Cost Q* 2 Profit 1 -Profit 2 2 10 Unselected V Snapping 0 10 20 30 40 50 60 70 80 90 100 Quantity | Clear All C"

Explanation / Answer

Part 1

For the question above the tools cannot be used here, so the explanation and procedure to draw the required curves is explained.

Marginal Revenue(to be drawn in red)= TR2 - TR1

For example from the graph

TR1 at P=80 is 80X10=800

TR2 at P=70 is 70X20=1400 and so on

MR= TR2 - TR1 = 1400-800=600

TR3 at P=60= 1800

so next MR= 1800-1400= 400 and so on

Though definitionally MR is the revenue derived by selling ONE additional unit the procedure yeilds the same output

The MR curve so derived is the MR1 before the campaign

For the MR curve after the campaign

we focus on the demand curve after the campaign i.e. Demand curve 2

At price 130 the quantity demanded is 12.5 so the TR would be

TR'1 = 130X12.5=1625

and TR'2 at P=120 is 2400

so the MR is 2400-1625=775

using the same procedure we get MR2

TR3 at P=110 is 2,750

MR2 = 2,750-2,400= 350

we plot these points on the graph as a darker shade of red to get MR after the campaign

when we plot these values for every quantity given we get the MR curve

Part 2

Equilibrium quantities and Prices

Once the MR curve is drwan we are ready to get our equilibrium

Equilibrium is at the point where MC= MR

For the equilibrium before the camapign

the point of intersection of MC1(green) and the red MR1 is the equilibrium(E1)

From this point of intersection or equilibrium drop a perpendicular line using a drop line tool to the X-axis or the quantity axis. The quantity is the equilibrium qunatity produced.

From this point of intersection or equilibrium draw a perpendicular line using a drop line tool to the Y-axis or the price axis. The price is the equilibrium price charged.

Similarly for the post campaign equilibrium :

the point of intersection of MC2(dark green) and the red MR2 is the equilibrium(E2)

From this point of intersection or equilibrium drop a perpendicular line using a drop line tool to the X-axis or the quantity axis. The quantity is the equilibrium qunatity produced.

From this point of intersection or equilibrium draw a perpendicular line using a drop line tool to the Y-axis or the price axis. The price is the equilibrium price charged.

Part 3

Average Cost with and without advertisement

Without adevrtisement

At point E1 draw a line form Q1 extending upto the AC1 curve

From this point on the AC1 curve draw a line to the Y-axis using a horizontal line tool. The price so derived is the AC1 or AC before advertising

With advertising

Without adevrtisement

At point E2 draw a line form Q2 extending upto the AC2 curve

From this point on the AC2 curve draw a line to the Y-axis using a horizontal line tool. The price so derived is the AC2 or AC with aadvertising

Part 4

The difference between AR and AC is the Average Profit or the per unit profit or loss

Multiply it with the number of units produced to get the total profit or loss

On the graph without adevrtising and at E1

Draw a horizontal line between AR1( or the light blue demand curve) and the AC1 (or the dark blue AC curve) gives us the Average profit. From these two points on the AC1 and AR1 curves draw horizontal lines to the Price axis. The rectangle so derived, is the total profit. It can also be drawn using the quadrilateral tool in the covering this area as derived.

On the graph with adevrtising and at E2

Draw a horizontal line between AR2( or the dark blue demand curve) and the AC2 (or the light blue AC curve) gives us the Average profit. From these two points on the AC2 and AR2 curves draw horizontal lines to the Price axis. The rectangle so derived, is the total profit. It can also be drawn using the quadrilateral tool in the covering this area as derived.

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