Posted by Heather on Thursday, November 23, 2006 at 10:19pm.
Auto Maintenance Services (AMS) is a small auto service outlet in a suburban area of Syracuse. In reaction to a small increase in wages that has caused the marginal cost of this auto service establishment to increase from $25 to $30, the owner is considering raising the prices of the services AMS offers. The owner's daughter, who is studying economics and takes care of her father's books and finances advises him against that. She has estimated that if AMS raises its prices it will face the weekly demand curve Q = 140 - 2.5 P, whereas if it lowers its price it will face the demand curve Q'= 55-.625P.
a. Determine the (average) price AMS is charging for its services, presently.
b. Determine the number of cars it services each week.
c. Using the point price elasticity formula, calculate the elasticity measures of the demand AMS faces at its present (average) price.
d. Assuming that the owner's daughter is correct, what is the MC range within which AMS should not change its price?
e. AMS's weekly total fixed cost is $250. Assuming that the firm's marginal cost and average variable cost are equal (AVC =MC), determine its weekly profit after the wage increase.
f. What should AMS do if its MC goes up to $40? Explain.
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