With the given information, it can be seen that as it is a linear equation, only two points will be enough to determine the demand curve. Keeping this in mind, if we calculate the demand when the price “P” is equal to $ 25, the quantity demand will be equal to:
Q= 40,000 - 500P
Q= 40,000 - 500*25
Q= 27500 units
Similarly, when the price is $ 35, the quantity demand in that case will be:
Q= 40,000 - 500P
Q= 40,000 - 500*35
Q= 22500 units
With these two points, the demand curve can be plotted which looks like:
Part II:
The elasticity of the demand for these two prices can be calculated with the given formula
QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
Elasticity Worksheet
Q1
27500
Q2
22500
P1
25
P2
35
(Q2 - Q1) / Q1
-0.18182
(P2 - P1) / P1
0.4
divide
-0.45455
The elasticity of demand in the above case is just about -0.45 if taken in the absolute terms. The elasticity of less than one implies that there won't be any significant change in the quantity demand of the product if there is a change in the price there won't be any drastic change in the quantity demand of the product (Raftery, 2000).
The business is worth pursuing due to the relationship that exists between the demand and supply.
If one strictly looks at the elasticity of the business, it can be seen that as prices are not really significant as far as revenue earning capacity of the business is concerned, so it implies that even if prices are increased to a certain level;, there are chances that demand won't be affected a lot due to it. Thus it can be said that business is worth pursuing.
If 22,000 units of the product are sold, the fixed cost as given above equals, as total cost is given by:
TC = FC + VC (Q)
So first we need to see the variable cost per unit for the business, as the average cost is given as $ 20, variable cost can be calculated by:
AC = AFC + AVC(Fixed cost $ 10,000)
20 = 10000/22000 + AVC
20 = 0.45 + AVC
AVC = 20 - 0.45
AVC = 19.55
As average cost will be same for all the number units as it does not depend upon the units, total cost can be calculated by:
TC = 10000 + 19.55(22000)
TC = 440100
So the total cost for number of units given above is $ 440100.
The marginal cost is defined as the cost of the each additional unit that is being produced by the business. Marginal cost can be calculated by adding. It is one of the more important concepts of the microeconomics and great cause for concern for some of the business as it helps the business to take a correct decision as far as its productivity and revenue is concerned (Øvretveit, 2000). The marginal cost cannot be calculated as not enough data is provided.
There are many implications for the business as far as running in the short and long run is concerned, and it can be clearly determined when one looks at the ...