Problems
1. Airway Express has an evening flight from LA to NY with an average of 80 passengers and a return flight the next afternoon with an average of 50 passengers. The plane makes no other trip. The charge for the plane remaining in NY overnight is $1,200 and would be zero in LA.
The airline is contemplating eliminating the night flight out of LA and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed costs for the plane are $3,000 per day whether it flies or not.
(a) Calculate and Compare the profit under each flight?
(b) is asking: Should Airway Express continue providing the flight between LA and NY? Even if Airway Express decides not to fly, it still has to pay the fixed costs of $3,000 per day. The evening flight with the return flight the next afternoon is counted as 1 day, not 2 days.
2. Electric utility companies usually operate their most modern and efficient equipment continuously (around the clock) and use their older and less efficient equipment only to meet periods of peak electricity demand.
(a) What does this imply for short-run marginal cost of these firms?
(b) Why do these firms not replace all their older equipment with new equipment in the long-run?
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Total fixed costs:
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Copyediting
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$10,000
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Typesetting
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70,000
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Selling and Promotion
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20,000
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Total fixed costs
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100,000
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Average variable costs:
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Printing and binding
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$6
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Administrative costs
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2
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Sales commission
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1
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Bookstore discounts
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7
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Author's royalties
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4
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Average variable costs
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$20
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Project selling price
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$30
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(a) Find the publisher's breakeven output and the output that wold lead to a total profit of $60,000, if, as a result of a technological breakthrough in printing, the publisher was able to lower its TFC to $40,000.
(b) Find publisher's breakeven output and the output that would lead to a total profit of $60,000 if total fixed costs remained at $100,000 but average variable costs declined to $ 10. (no chart needs to be drawn, show work and answers).
Spreadsheet Problem 1
For the following table, calculate in Excel the average fixed costs (AFC), the average variable costs (AVC), the average total costs (ATC), and the marginal costs (MC).
Part -2
Problem 1.
Most book publishers pay authors a percentage of the revenue from book sales. Explain the conflict that this creates between publishers and authors when the goal of publishers is to maximize profit?
If the market supply function of a commodity is Qs=3,250 and (a) the market demand function is Qd=4,750-50P and P is expressed in dollars, use Excel to calculate what the equilibrium price is by calculating values of Qd and Qs for P from 25 to 50 in 1's. (d) For (a), if TC= 0.005Q^2-Q, what is the profit? (show all work and answers)
2. Suppose that new entry decreased your demand elasticity from -2 to -3 (made demand more elastic). By how much should you adjust your price of $10? Think about substitutes and complements. For example, marijuana and snack foods are strong complements (or so we are told).
3. Relative to managers in more monopolistic industries, are managers in more competitive industries more likely to spend their time on reducing costs or on pricing strategies?
4. How does a decrease in U.S. interest rates affect the Eu/U.S. exchange rate? Use the carry trade to predict the impact of lower U.S. interest on Euro/$.
5. How will a dollar devaluation affect businesses and consumers in the twin cities of El Paso, United States, and Juarez, Mexico? Make sure you explain the impact on the twin cities, not just 1 city.