Economics = e) Economic profit = (18,400 – 11,499)/0.97 = £7,114He should enter the business since this is positive5. Valley produces bicycles, and is currently selling 260 per month of a particular model. Itstotal costs are £90,000 per month. It is currently charging a price of £500, but this hasrecently been reduced from £560, because sales were only reaching 225 units per month.The increase in sales has also increased costs by £10,500 per month. The firm hasestimated that it has a linear total cost function and that its price elasticity of demand isconstant.a) Calculate the price elasticity of demand at the current price.b) Derive the demand and cost functions for the firm.c) Calculate the optimal markup for the firm, and its profit-maximizing price and output.d) Calculate the amount of profit that the firm is currently foregoing.e) Comment on the firm's current pricing strategy

Economics = e) Economic profit = (18,400 – 11,499)/0.97 = £7,114He should enter the business since this is positive5. Valley produces bicycles, and is currently selling 260 per month of a particular model. Itstotal costs are £90,000 per month. It is currently charging a price of £500, but this hasrecently been reduced from £560, because sales were only reaching 225 units per month.The increase in sales has also increased costs by £10,500 per month. The firm hasestimated that it has a linear total cost function and that its price elasticity of demand isconstant.a) Calculate the price elasticity of demand at the current price.b) Derive the demand and cost functions for the firm.c) Calculate the optimal markup for the firm, and its profit-maximizing price and output.d) Calculate the amount of profit that the firm is currently foregoing.e) Comment on the firm's current pricing strategy

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter11: The Firm: Production And Costs

Section: Chapter Questions

Problem 3P

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