Question

9. Critical analysis Q17

Rod N. Reel owns a dealership that sells fishing boats in an open, price-searcher market. To develop his pricing strategy, Rod hired an economist to estimate his demand curve. The first two columns of the chart provide the data for the expected weekly quantity demanded for Rod's fishing boats at alternative prices. Rod's marginal (and average) cost of supplying each boat is constant at $7,000 per boat, no matter how many boats he sells per week in this range. This cost includes all opportunity costs and represents the economic cost per boat.

Complete the following table by finding the total revenue and total cost per week at each quantity, the marginal revenue and marginal cost from the sale of each additional boat, and the economic profit per week at each quantity.

Price of Fishing Boats	Fishing Boats Sold	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost	Economic Profit
	(Boats per Week)	($ per Week)	($ per Week)	($ per Week)	($ per Week)	($ per Week)
$9,000	0	$0		$0		$0
					$7,000
$8,000	1
					$7,000
$7,000	2
					$7,000
$6,000	3
					$7,000
$5,000	4
					$7,000
$4,000	5

If Rod wants to maximize his profits, he should charge a price of   per boat. At this price, Rod will sell   boats per week at the profit-maximizing price.

At this price and sales volume, Rod’s profits per week will be

True or False: At the price and sales level where profits are maximized, Rod has sold all boats that have higher marginal revenue than marginal cost.

True

False

Rod's profits are typical of all firms in the boat sales business.

These profits will induce firms to   the industry until economic profits are eliminated

Recall the relationship between elasticity of demand, price changes, and their impact on total revenues.

As Rod lowers his price from $9,000 to $5,000 his total revenues keep . Thus, demand is   over this range of prices.

When Rod lowers his price from $5,000 to $4,000, his total revenues . Thus, demand is   between these two prices.

Answer 1

If Rod wants to maximize his profits, he should charge a price of $8000 per boat. At this price, Rod will sell 1 boat per week at the profit-maximizing price.
At this price and sales volume, Rods profits per week will be $1000
True
True, as it is in perfect competition
These profits will induce to enter the industry until economic profits are eliminated
From $9000 to $5000, the demand is elastic between these two prices
From $5000 to $4000, the demand is inelastic between these two prices