Monterey’s Restaurant is currently the only restaurant in town that sells Mexican food. Monterey’s advisors estimate that the demand for Mexican food in the area is given by:
Q = 10 -0.5P
Where P is the average price of a meal and Q is the quantity of meals. The restaurant’ s costs are estimated with the following equation:
TC = 150 + 5Q + 0.5Q2
- Given this information, how much output should Monterey’s produce to maximize profits?
f.How much should it charge for each meal? Is Monterey’s restaurant making a profit? If yes, how much?
g.Without doing any calculations, if you were Monterey’s advisors, what would you recommend they do to improve their profits ?
h.Suppose that price discrimination was an option available to Monterey’s? What would Monterey’s need to do to be able to practice second or third degree price discrimination?
Show all your work. Your explanation determines your grade.
When producing 10 units, Jean has total variable costs of $400, total fixed costs of $550, and assets of $3000. Assume you can approximate MC with AVC.
- If she wants a return of 10%, what price should she charge?
- Suppose that instead of determining price based on his target return, Jean decides to use a standard markup pricing scheme. What is the optimal markup for Jean if she estimates that the price elasticity of demand for her product is -2?
- If she uses the optimal markup obtained in part b, how much should he charge for her product?
- Given your answers to parts a and c, which pricing mechanism should he chose? How would your answer change if the price elasticity for her product decreases considerably due to an decrease in the availability of substitutes.
Show all your work. Your explanation determines your grade
The Allen Corporation, a sofa retailer, wants to determine how many sofas it must sell in order to earn a profit of $10,000 per month. The price of each sofa is $400, the average variable cost is $200. What is the required sales volume if fixed costs are $4000 per month?
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