Question

Suppose a firm faces the following demand curve: q(p) = 10000 - 800p Also the varaible cost per unit is $5 and the fixed cost is $10000. The firm will charge a price of $8.75

1. What will the profit be at a price of $8.75

2. What is the price elasticity of demand?

3. At what price will an increase in price lead to revenue falling instead of rising.

Answer 1

1	q(p)=10000-800p
	q(p)=10000-800*8.75=	3000
	Revenue	26250	=3000*8.75
Less:	Variable cost	15000	=3000*5
	Contribution Margin	11250
Less:	Fixed Cost	10000
	Net Income	1250
2	Price Elasticity=percentage change in demand/percentage change in price	-2.33	=(20/-8.57)
	P	8.75
	Q	3000
	Assume p1	8
	Q1	3600	=10000-800*8
	Percentage change in demand=(Q1-Q)/Q	20.00%	=(3600-3000)/3000*100
	Percentage change in price=(P1-P)/P	-8.57%	=(8-8.75)/8.75*100
3	At 8.75 increase in price will lead to decrease in revenue since PED is elastic. When Price elasticity is elastic then increase in price result in decraese in revenue.