Reference no: EM131021156

Question 1

a. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-pound bags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store's inventory of 200 bags of charcoal was completely sold out. The store normally sells an average of 150 bags per week.

i) What is the store's arc elasticity of demand for charcoal?

ii) Give an economic interpretation of the numerical value obtained in part a (i).

b. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each. Sales have averaged 10,000 units per month during the last year. Recently Future Flight's closest competitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future Flight noticed that its sales declined to 8,000 units per month after the price cut.

i) What is the arc cross elasticity of demand between Future Flight's and Soaring Free's Frisbees?

ii) If Future Flight knows the arc price elasticity of demand for its Frisbees is 2.2, what price would they have to charge in order to obtain the same level of sales as it was before the Soaring Free's price cut?

2. For each of the following cost-output relationships, describe the shape (U-shape, decreasing, increasing, constant) of the average total cost and marginal cost functions

(C  = total cost, Q = output):

i) C = 42,500,000 + 2550Q

ii) C = 8.48 + 0.65Q + .0022002

b. Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.

i) Determine the breakeven output (in dollars).

ii) Determine the number of barrels of oil that offshore must produce and sell in order to earn a target (operating) profit of $1,500,000.

iii) Determine the degree of operating leverage at an output of 400,000 barrels.

iv) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a standard deviation of 100,000 barrels, determine the probability that Offshore will incur an operating loss.