I need help on some homework questions for an MBA-level Managerial Economics class. Here is the first question.
1. JALT, Inc. is a new firm offering investment consultant services to the rich. Harvey Milkemnow, having had experience in this area, is the potential new research manager. Milkemnow is personally obligated to render the service but insists on charging $4,000 per client per month. The fixed costs of running the operation are $3,000 per month and Milkemnow's fees are the only variable cost. JALT has determined that it has the following monthly demand schedule:
P = $5,000 - $40.00Q where
P is the price that clients pay monthly
Q is the number of clients
Should JALT, Inc. take up the venture?
If someone could at least tell me where to get started, it would be much appreciated. I don't even know where to start. :( Thanks!
This is a standard monopoly model question. (JALT acts like a monopolist). So, find the point where marginal cost (MC) = marginal revenue (MR). MC is easy. its the $4000 fee paid to Harvey.
Total revenue is P*Q = 5000Q+40Q^2. Marginal revenue is the first derivitive of total revenue. So, MR = 5000-80Q. Now MC=MR is 4000=5000-80Q. Solve for Q.
I get Q=50. This is the profit maximizing (or loss minimizing point) Now check if the firm makes a profit at Q=50. Take it from here.
My bad, I re-get Q=12.5. take it from here.
Thank you so much for your help! Your explanation definitely helps me a lot. :)
I got Q=12.5 as well. I'm assuming this is correct, thanks
To determine whether JALT, Inc. should take up the venture, we need to analyze the economics of the business and calculate the profit or loss that would be generated.
First, let's break down the given information to understand the cost and revenue structure.
Fixed Costs:
- The fixed costs of running the operation are $3,000 per month.
Variable Costs:
- Milkemnow's fees are the only variable cost, which are $4,000 per client per month.
Demand Function:
- The demand function provided is P = $5,000 - $40.00Q, where P is the price that clients pay monthly, and Q is the number of clients.
To determine the optimal number of clients that JALT should serve and the price it should charge, we need to find the point where total revenue equals total cost.
1. Total Revenue:
Total Revenue (TR) is the price (P) multiplied by the quantity (Q).
TR = P * Q
2. Total Cost:
Total Cost (TC) consists of fixed costs (FC) and variable costs (VC).
TC = FC + VC
3. Profit/Loss:
Profit (or loss) is calculated by subtracting total cost from total revenue.
Profit = TR - TC
Based on the information provided, the steps to determine whether JALT should take up the venture are as follows:
Step 1: Find the optimal number of clients (Q) that maximizes profit. To do this, set the derivative of profit with respect to Q equal to zero and solve for Q.
Step 2: Calculate the price (P) charged to clients using the demand function equation P = $5,000 - $40.00Q.
Step 3: Calculate total revenue (TR) by multiplying the price (P) by the optimal number of clients (Q).
Step 4: Calculate total cost (TC) by adding the fixed costs (FC) and variable costs (VC).
Step 5: Calculate the profit (or loss) by subtracting total cost (TC) from total revenue (TR).
If the profit is positive, it indicates a potential opportunity for JALT, Inc. If the profit is negative, it suggests that the venture may not be economically feasible.