Managerial Economics
posted by Mo .
Everkleen Pool Services (EPS) provides weekly swimming pool maintenance in Jeddah. Dozens of firms provide this service. The service is standardized; each company cleans the pool and maintains the proper levels of chemicals in the water. The service is typically sold as a fourmonth summer contract. The market price for the 4month service contract is US$115.
EPS has fixed costs of US$3500. The manager has estimated the following marginal cost function for EPS, using data for the last two years:
MC = 125 – 0.42Q + 0.0021Q2
Where MC is measured in dollars and Q is the number of pools serviced each summer. Each of the estimated coefficients is statistically significant at the 95 percent confidence level.
1Given the estimated marginal cost function, what is the average variable cost function for EPS?
2At what output level does AVC reach its minimum value? What is the value of AVC at its minimum point?
3Should the manager of EPS continue to operate, or should the firm shut down? Explain.
4The manager of EPS finds two output levels that appear to be optimal. What are these levels of output and which one is actually optimal?
5How much profit (or loss) can the manager of EPS expect to earn?
6Suppose that EPS fixed costs rise to US$4000. How does this affect the optimal level of output? Explain.
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