Problem: Power Brokers, Inc., a discount brokerage firm, is contemplating opening a new regional office in Providence, Rhode Island. An accounting cost analysis of monthly operating costs at a dozen of its regional outlets reveals average fixed costs of $4,500 per month and average variable costs of:
AVC = $59 - $0.006Q
Where AVC is average variable cost in dollars and Q is output measured by number of stock and bond trades. A typical stock or bond trade results in $100 of gross commission income, with PBI paying 35% to its sales representative.
Q1. Estimate the trade volume necessary for PBI to reach a target return of $7,500 per month for a typical office.
Q2. Estimate and interpret the elasticity of cost with respect to output at the trade volume found in part A.