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The company produces specialised industrial air extraction 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 £800,000 labour costs per unit ‘e’ are £100 and raw material costs per unit ‘f’ are £258. They also spend £40,000 ‘V’ 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 + V
The demand function is as follows;
P = a – bQ + c√V
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 output? Construct