Reference no: EM1321214

Question 1:

A What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.

            In economics, profit maximization is the short run or long run process by which a firm determines the prices and output level that returns the greatest profit. There are several approaches to this problem the total revenue - total cost and focuses on maximizing the is difference, and  the marginal revenue- marginal cost perspective is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal costs.

C =5000- 25P

C= 1500 + 20Q +0.02 Q²

B How much economic profit do you expect that Robert's company will make in the first year?

Any such patent would be of extremely limited value due to the low barriers to entry to parallel market by competitor. Anyone and their innovation could easily make equivalent products with the identical function that would not infringe the patents.

 

C. do you expect this economic profit level to continue in subsequent years? Why or why not?

The so called monopoly would consist of the market of people who were too naive to buy something equivalent or cheaper from a competitor. also it would cost the company  more  in legal fees and court cost to actually attempt to enforce its patent, and the patent could be ruled by the court as being invalid, spoiling the whole game and negativing any manufacturing or import license fees charged by the paten owner. Patent generally expire within 20 years of the filing date, if not sooner. 

Problem 2:

Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC's price for the typical lawn system was $1,900 compared with BLG's price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.)

GGC has substantial excess capacity-it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed several hundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows:

Qw =2100 - 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw

for the western market and

Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye

for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC's cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems.

Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.

a.       Derive the demand curves for GGC's product in each market.

Qw =2100- 6.25Pgw +3 Pbw +2100Ag - 1500 Ab + 0.2 Yw

Qe=36620-25Pge+7Pbe +1180Ag- 950Ab+0.085Ye

The W's are for the western, E's for eastern G's are for Greener Grass Company (GGC) and B's are for the Better Lawns and Gardens (BLG).

The income and prices and derive function for the price Qw=2100-6.25Pgw +3Pbw *2100Ag + 2100 *1.5 -1500*1.2 + 0.2*5500

Pgw=20743.70/6.25-Qw/6.25 is the derived demand curve=Pgw =3328.88-6.25Qw Similar for the eastern states Qe =36620-25Pge +7*1500 +1180*1.5-950*1.2 +0.085 *25000

Pge =50800/25- Qe/25 is the derived demand curve Pge =2032-

b.      Derive GGC's marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGC's demand, MR, and MC curves for each market.

c.       Derive algebraically the quantities that should be produced and sold, and the prices that should be charged, in each market.

We can calculate e quantiy exactly by setting MR = MC and solvind for Q and then  using that Q value to find P from the demand curve:

For the Western Market:

For the Eestern Market:

d.      Calculate the price elasticity's of demand in each market and discuss these in relation to the prices to be charged in each market.

The price elasticity  of demand in the western  states is:

Elasticity (western)= ( dQe/ dPe)*)Pe/Qe)= (-25) *

e.       Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendations.