Instructions: 1. Calculate the following 4 questions and, 2. Explain your reason
ID: 1096898 • Letter: I
Question
Instructions:
1. Calculate the following 4 questions and,
2. Explain your reasoning
An auto-service establishment has estimated its monthly cost function as follows:
TC = 6000 + 10 Q , where Q is the number of cars it services each months and TC represents its total cost.
The firm is targeting 35,000 net monthly profit servicing 2000 cars.
A. What price should the firm charge to realize the targeted profit?
B. What would be its (cost-based) markup ratio?
C. Now suppose the demand curve the firm faces is: Q = 3000 - 50 P. Is the firm going to achieve its profit goal? Explain.
D. If your answer to question C part (b) is "no", what should be the optimal markup ratio for this firm?
Explanation / Answer
A
Total Cost = 6000 + 10*2000 = 26000
Total Profit = 35000
Total Revenues required = 26000 + 35000 = 61000
No. of units to be sold = 2000
Price = 61000/2000 = 30.5
B
At a cost of 26000 we need a profit of 35000
Thus, markup = profit / cost
= 35000/26000 = 1.35
C
Units sold at P = 30.5,
Q = 3000