Homework Help: Economics

Posted by Tell on Saturday, April 18, 2009 at 10:07am.

1) Lowering the price by 10%. What is the break-even level of output?

The company produces specialized glass units and is concerned that, as the market leader, they should be able to make higher profits than they currently are. The firm’s costs are as follows; overheads ‘d’ are Ł800,000 labour costs per unit ‘e’ are Ł100 and raw material costs per unit ‘f’ are Ł258. They also spend Ł40,000 ‘X’ per period on advertising and are capable of producing up to 1,000 units in each period.

The total cost function is expressed as;
TC = d + eQ + fQ + X
The demand function is as follows;
P = a – bQ + c√X
where a = 4,000, b = 3 and c = 3.

2) Doubling the advertising budget. What is the break- even level of the output?

Maths - Tell, Sunday, April 19, 2009 at 9:30am
The company produces specialized glass units and is concerned that, as the market leader, they should be able to make higher profits than they currently are. The firm’s costs are as follows; overheads ‘d’ are Ł800,000 labour costs per unit ‘e’ are Ł100 and raw material costs per unit ‘f’ are Ł258. They also spend Ł40,000 ‘X’ per period on advertising and are capable of producing up to 1,000 units in each period.

The total cost function is expressed as;
TC = d + eQ + fQ + X
The demand function is as follows;
P = a – bQ + c√X
where a = 4,000, b = 3 and c = 3.

1)Lowering the price by 10%. What is the break-even level of output

2) Doubling the advertising budget. What is the break- even level of the output?
Economics - economyst, Monday, April 20, 2009 at 9:17am
Interestingly, you are asking for the break-even level of output rather than the profit-maximizing level. Hummm.

Anyway. This is simply an algebra problem. First collapse the two Q terms in TC. So, TC=800,000+358Q + 40000
Total Revenue is P*Q. So, TR=4000Q-3Q^2 + 600Q
Set TC=TR and solve for Q (subject to the constraint that Q<=1000)

1) Repeat cept multiply all terms in the TR equation by 0.90
2) Repeat cept change advertising by 40K.

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