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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?
What is the average fixed cost of producing 2 units of output based on the following table:
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The demand for energy in the United States is often stated as persistently non-cyclical and not sensitive to both prices effects. Given such characteristics, explain the effect of each of the following on the demand or supply for gasoline.
Describe the market growth rate for product and service.
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The market for a standard-sized cardboard container comprises two firms: BooBox and Flimflax. As manager of BooBox you enjoy patented technology which permits your company to produce boxes faster and at lower cost than Flimflax.
Generally, which of the following is true? (where rE is the cost of equity, rD is the cost of debt and rA s the cost of capital for the firm.
Using an aggregate supply diagram and aggregate demand or model of the economy, graphically explain and discuss the short-run and long-run effects.
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