Question

Suppose a firm faces the following demand curve: q(p) = 10000 - 800p Also the varaible...

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.

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Homework Answers

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.
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