Cost Elasticity
Power Brokers, Inc. (PBI), a discount brokerage firm, is contemplating open- ing 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 costs (in dollars) and Q is output measured by number of stock and bond trades.
A typical stock or bond trade results in $100 gross commission income, with PBI paying 35% of this amount to its sales representatives.
A. Estimate the trade volume necessary for PBI to reach a target return of $7,500 per month for a typical office.
B. Estimate and interpret the elasticity of cost with respect to output at the trade volume found in part A.