Wyandotte Chemical Company sells a variety of chemicals to the automobile Company. Wyandotte currently sells 30,000 gallons of polyol every year at an average price of $15 per gallon. Fixed expenses of manufacturing polyol are $90,000 every year as well as total variable expenses equal $180,000. The operations research department has predicted that a 15 percent increase in output would not affect fixed costs but would reduce average variable costs by 60 cents per gallon. The marketing department has estimated the arc elasticity of demand for polyol to be -2.0.
a. How much Wyandotte have to decrease the price of polyol to attain a 15% increase in the quantity sold?
b. Estimate the impact of such a price cut on (i) revenue total, (ii) costs in total, (iii) profits in total.