I need help with this questions. You may use a calculator or Excel, but please s
ID: 1167227 • Letter: I
Question
I need help with this questions. You may use a calculator or Excel, but please show your work completely:
QUESTIONS:
Cal Overhalt operates an ExxonMobil gas station franchise in Fitzhugh, MD. The price of gasoline is volatile and varies greatly from day to day. The price per gallon varies based on the seasonal blend of gasoline, which is determined by clean-air requirements, and Cal's pricing choices are limited to the profit margin for his price.
He recently raised the price of gas by 1 cent per gallon, and his profit declined. Cal would like you to measure his business gains or losses based on the price of $2.459 per gallon. Cal competes with a local brand on the opposite corner that typically sells gas for 4 to 5 cents per gallon less than his station. They are currently selling gasoline for $2.419 per gallon. Recently, regular gasoline for delivery in New York harbor sold for $1.76 per gallon.
To the right are additional charges that Cal must pay on each gallon of gasoline
Base price of unleaded regular delivered in New York $1.760
Added Cost To Cal:
MD state gasoline tax $0.303
Federal gasoline tax $0.184
Delivery $0.050
Advertising to ExxonMobile $0.020
Additives $0.030
Total Additions $0.587
Total Cost per Gallon $2.347
1). Cal sold 3,600 gallons per day at a price of $2.459 per gallon. He raised the price 1 cent to $2.469 per gallon, and revenues and profits dropped. His station sold 3,200 gallons per day at $2.469 per gallon. What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? What does this mean and why does it matter? Will revenues increase or decrease as a result of the price cut? By how much? Cal tells you that his fixed costs are $50 per day. By how much did profits decline? (Profits are revenues minus all costs.)
2). After seeing your analysis of his decline in profit, Cal decides to lower the price of gas to $2.449 per gallon. After this change, the volume sold increased to 4,000 gallons per day. He asks you to measure his business gains or losses at $2.449. What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? What does this mean and why does it matter? Will revenues increase or decrease as a result of the price cut? By how much? Cal tells you that his fixed costs are $50 per day. By how much did profits increase or decline? (Profits are revenue minus all costs.)
3. After seeing the result, Cal decides to lower his price once again to $2.439 per gallon. Once again, volume increases and settles at 4,400 gallons per day. He is worried that any further price cut will cause the discount station across the street to also lower it price. He wants to know what his price should be. What is the price elasticity of demand? Can the elasticity be characterized as elastic, inelastic, or neither? What does this mean and why does it matter? Will revenues increase or decrease as a result of the price cut? By how much? Cal tells you that his fixed costs are $50 per day. By how much did profits increase or decline? (Profits are revenue minus all costs.)
4). Cal's son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal revenue (MR). Cal asks you for a definition of each. You tell Cal that his marginal cost is the same as his variable cost, or $2.347 per gallon. Marginal revenue is more difficult. Marginal revenue is the increase in total revenue from selling one more unit or gallon. You decide that if a price change of 1 cent causes demand to change by 400 gallons, then a price change of 1 cent divided by 400 gallons is the price change to sell one more gallon. Given that you know the price and quantity of gallons sold so far, and that Cal's cost is $2.347 per gallon, complete the table below:
Profit Maximization
Marginal Cost
(Cost per unit x Volume)
5.) Once you calculate total profit, what is the profit maximizing price?
6) Next calculate marginal revenue, knowing that it is the difference between the revenue at the price shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price. Complete the table below:
Marginal Revenue
7) Does MC = MR at the maximum profit point?
Base price of unleaded regular delivered in New York $1.760
Added Cost To Cal:
MD state gasoline tax $0.303
Federal gasoline tax $0.184
Delivery $0.050
Advertising to ExxonMobile $0.020
Additives $0.030
Total Additions $0.587
Total Cost per Gallon $2.347
Explanation / Answer
1
At price $ 2.459 Cal sells 3600 gallons of gasoline
At increased price of $ 2.469 Cal sells 3200 gallons of gasoline
Price Elasticity of Demand= % change in quantity demanded/% change in price
Percentage change in price= 2.469- 2.459= 0.01/2.459x100= 0.40
Percentage change quantity demanded= 3600-3200= 400/3600x100= 11.11
Price Elasticity= 11.11/0.40= 27.77
Price elasticity is elastic
if price elasticity is elastic then it means with an increase or decrease in price its quantity demanded gets decreased or increased by more than one, means change in quantity demanded is more than change in price.
As a result of price cut revenue will increase since due to decrease in price will cause increase in its quantity demaded.
Suppose price gets decreased from $ 2.469 to $ 2.459 then quantity demanded gets increased from 3200 to 3600 gallons of gasoline.
Revenue at $ 2.469 per gallon= 2.469x3200= $ 7900.8
Revenue at $ 2.459 per gallon= 2.459x 3600= $ 8852.4
Increase in revenue: $ 951.6
Cal's cost at $2.347 per gallon for 3200 gallons of gasoline= 7510.4
Cal's fixd cost per day= $ 50
Cal's total cost= $ 7560.4
Calls revenue at price of $ 2.469 for 3200 gallons of gasoline= $ 7900.8
Cal's profit= $ 7900.8- $ 7560.4= $ 340.4
Cal's cost at $2.347 per gallon for 3600 gallons of gasoline= 8449.2
Cal's fixd cost per day= $ 50
Cal's total cost= $ 8499.2
Calls revenue at price of $ 2.459 for 3600 gallons of gasoline= $ 8852.4
Cal's profit= $ 8852.4- $ 8499.2= $ 353.2
Decline in profits: $ 353.2- $ 340.4= $ 12.8
2
After reduction in price by Cal, Price of gas is $ 2.449
Quantity sold at above price is 4000 gallons of gasoline
Revenue: $ 2.449X4000= $ 9796
Cost= $ 2.347x4000= $ 9388
Fixed cost= $ 50
Total cost= $ 9438
Profit= $ 358
Percentage change in price= 2.459-2.449= 0.01/2.459x100= 0.40
Percentage change quantity demanded= 4000-3600= 400/3600x100= 11.11
Price Elasticity= 11.11/0.40= 27.77
Price elasticity is elastic
if price elasticity is elastic then it means with an increase or decrease in price its quantity demanded gets decreased or increased by more than one, means change in quantity demanded is more than change in price.
Revenue will increase due to price cut by $ $ 9796
Revenue: $ 2.449X4000= $ 9796
Cost= $ 2.347x4000= $ 9388
Fixed cost= $ 50
Total cost= $ 9438
Profit= $ 358