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Linear demand equation

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Reference no: EM131499175

Answer the next 6 questions using the following information:

Drill Quest, Inc. manufactures drill bits for the oil industry. Drill Quest uses cost-plus pricing to set the price of its bits. Currently Drill Quest applies a 50 percent markup on average total cost. Average variable cost of producing bits is constant and equal to $6,000 per bit. Total fixed cost at Drill Quest is $550,000. DrillQuest currently produces 690 bits. Statistical estimation of demand for Drill Quest brand bits produces the following linear demand equation (where Q is the number of bits demanded and P is the price of bits): 

1. Using cost-plus pricing, Drill Quest prices its bits at $                            per bit.

A. $10,195

B. $12,175

C. $797

D. $6,000

E. $6,797

2. Using the cost-plus price in question 2, Drill Quest earns profit of (approximately) $                      by selling 690 bits.

A. $2,895,000

B. $2,345,000

C. $3,500,000

D. $3,895,000

E. $4,895,000

3. Use the MR = SMC approach to finding the profit-maximizing point on the demand for Drill Quest's bits. The profit-maximizing number of bits to sell is

A. 250

B. 300

C. 350

D. 400

E. 450

4. Use the MR = SMC approach to finding the profit-maximizing point on the demand for Drill Quest's bits. The profit-maximizing price to charge is $              per bit.

A. $15,000

B. $12,500

C. $10,378

D. $10,245

E. $10,000

5. Use the MR = SMC approach to finding the profit-maximizing point on the demand for Drill Quest's bits. The maximum possible profit is $              .

A. $2,895,000

B. $2,345,000

C. $3,500,000

D. $3,895,000

E. $4,895,000

6. If Drill Quest wishes to use cost-plus pricing, it can maximize profit by applying a markup of            percent on                    .

A. 150 percent; AVC

B. 150 percent; ATC

C. 50 percent; AVC

D. 50 percent; ATC

E. 250 percent; AVC

Reference no: EM131499175

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