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A knitting mill sells about 20,000 units of its product per year at an average price of $10 each. Fixed costs amount to $60,000, and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs, but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The price elasticity of demand is estimated at -2.
a) Illustrate the initial equilibrium in a diagram. (Since the demand and cost equations are not available, a reasonable approximation of the curves is OK). Indicate the relevant magnitudes in the diagram.
b) Evaluate the impact of the proposal to cut prices on Total revenue Total cost Total profit
c) Illustrate the resulting equilibrium in a diagram and indicate the relevant magnitudes. (Since the equations are not available, a reasonable approximation is OK).
d) What is the firm's actual markup after the 5% price cut? What is the optimal profit-maximizing markup suggested by economic theory?
Write down a paragraph explaining how the Hernandez Corp. finds the least cost combination of inputs for producing the given rate of output.
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Consider a company that uses two inputs. The quantity used of input one is denoted by x_1 and quantity used of input 2 is denoted by x_2.
According to scientific nutritional studies in most nations, income of $1 a day does not provide sufficient food, shelter and clothing to live. Under these situations the medical risk of death is high.
Define the term "opportunity cost." Now that you have a definition of opportunity cost weigh the positives and negatives of taking a leave of absence from work and moving out of town to attend college full time, or maintaining your job while atten..
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