A tablet manufacturer recently introduced a new tablet. The company invested $150 million in equipment for the new design mold (the mold is malleable and can be sold for $100 million to be used on another project) and $40 million in a new microchip used specifically for the tablet (not valuable to anyone else). Labor and the cost of materials necessary to make each tablet are about $185.00. This year, a competitor has developed a similar phone that has significantly reduced demand for the new tablet. Now, the original manufacturer is deciding whether they should continue production of the new tablet.
- What, if anything, can be viewed as a sunk cost?
- What is the rule, as a function of quantity and price (ie, Q and P), as to whether THIS manufacturer should shut down?
- If the estimated quantity demanded is 500,000 phones, what is the break-even price for phone?
Parsons-Ashworth Bread Company hire you as their economist. Your first task is to estimate the price elasticity of demand for different bread products (Brandon's Plain White and Jared's Super Oat with Ginseng). You find that Brandon's Plain White variety has an elasticity of 2.1 while Jared's Super Oat with Ginseng version has an elasticity of .8 (all in absolute values). Historically, the elasticities have been stable.
- Consider Jared's Super Oat with Ginseng: are you profit maximizing, or do you need more information (and if so, what information)? Explain your answer.
- Consider Brandon's Plain White: are you profit maximizing, or do you need more information (and if so, what information)? Explain your answer.
- To increase revenue for Jared's Super Oat with Ginseng, should you raise or lower the price of your product or do you need more information (and if so, what information)? Explain your answer.
- To increase revenue for Brandon's Plain White, should you raise or lower the price of your product or do you need more information (and if so, what information)? Explain your answer.