Problem 1: Suppose you are hired to manage a small manufacturing facility which produces Widgets.
(a) You know from data collected on the Widget Market that market demand and market supply have both increased recently.
As manager of the facility what decisions should you make regarding production levels and pricing for your Widget facility?
(b) Now, suppose that following the supply and demand changes in (a), a substitute good goes up in price, and your costs of production increase. What new decisions will you make regarding production levels and pricing for your Widget facility?
In this case, the manager would increase the supply and price; but is should increase both in a controlled environment so that the total revenue profits does not drop (for example, raising price beyond a certain price might decrease the demand thus reducing overall profit) Also, the supply should be increased so that Marginal Cost< Marginal Revenue. Increasing the production levels more than increasing the price as now you can generate incremental net profit at same pricing.
Problem 2. Elasticity and Marginal Revenue
Here is some data on the demand for marshmallows:
Price Quantity
$10 100
$ 8 300
$ 6 700
$ 4 1300
$ 2 2200
a. Is demand elastic or inelastic in the $4-$6 price range? How do you know? (15 points out of 300)
b. If the table represents the demand faced by a monopoly firm, then what is that firm's marginal revenue as it increases output from 100 units to 300 units? Show all work.