Use the same data presented in Problem 3 to answer the following questions:
a. Explain the impact on the optimal price of designating the Ă˘â‚¬Ĺ“miscellaneousĂ˘â‚¬Âť cost item as fixed versus variable. (Hint: Do the pricing analysis assuming miscellaneous is a fixed cost and compare it with an analysis that assumes it is a variable cost.) b. Under what circumstances do you think the average variable cost would increase (as is generally expected in the economic analysis of cost)? Do you think the law of diminishing returns would play a role in increasing AVC? Explain. c. Under what circumstances do you think the average variable cost would decrease? Explain.
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A group of five students has decided to form a company to publish a guide to eating establishments located in the vicinity of all major college and university campuses in the state. In planning for an initial publication of 6,000 copies, they estimated the cost of producing this book to be as follows:
By engaging in this business, the students realized that they would have to give up their summer jobs. Each student made an average of $4,000 per summer. However, they believed they could keep expenses down by doing much of the research for the book by themselves with no immediate compensation. They decided to set the retail price of the book at $12.50 per copy. Allowing for the 20 percent discount that retail stores in their state generally required, the students anticipated a per-unit revenue of about $10.00. The director of the campus bookstore advised them that their retail price was far too high, and that a price of about $8.75 would be more reasonable for a publication of this kind. One of the students, who was a math and statistics major, asked the bookstore manager to provide her with historical data on sales and prices of similar books. From these data, she estimated the demand for books of this kind to be
a. Construct a numerical table for the retail demand curve, and plot the numbers on a graph. Calculate the elasticity of demand for the interval between $12.50 and $8.00. b. Do you think the students should follow the store managerĂ˘â‚¬â„˘s advice and price their book at $8.75? Explain. If you do not agree with this price, what would be the optimal price of the book? Explain. c. Assuming the students decide to charge the optimal price, do you think they should proceed with this venture? Explain. d. Assuming the studentĂ˘â‚¬â„˘s demand equation is accurate, offer some possible reasons why the bookstore manager would want to sell the book at the lower price of $8.75.