1. The elasticity of demand for a firms product is -2 and its advertising elasticity of demand is 0.1.
a. Determine the firms optimal advertising-to-sales ratio.
b. If the firms revenues are $50,000, what is its profit-maximizing level of advertising?
2. The CEO of a major automaker over heard one of its division managers make the following statement regarding the firms production plans: "in order to maximize profits, it is essential we operate at the minimum point of our average total cost curve." If you were the CEO of the automaker, would you praise or chastise the manager? Expalin.
3. When the first Pizza Hut opened its doors back in 1958, it offered consumers one style of pizza: its Original Thin Crust Pizza. Since its modest beginings, Pizza Hut has established itself as the leader of the $25 million pizza industry. Today, Pizza Hut offers five styles of pizza including the Original Thin Crust Pizza, Pan Pizza, and its Hand-Tossed Style. Explain why Pizza Hut has expanded its offerings of pizza over that past five decades, and discuss the long-run profitability of such such a strategy.
4. You are the general manager of a firm that manufacturers personal computers. Due to a soft economy, demand for PC's has dropped 50% from the previous year. Sales Manager of your company has identified only one potential client, who has received several quotes for 10,000 new PC's. According to the sales manager, the client is willing to pay $650 each for 10,000 new PC's. Your production line is currently idle so you can easliy produce the 10,000 units. The accounting department has provided you with the following information about the unit (or average) cost of producting three potential quantitites of PC's:
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10,000 PCs
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15,000 PC's
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20,000 PCs
|
|
Materials(PC Components)
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$500
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$500
|
$500
|
|
Depreciation
|
$200
|
$150
|
$100
|
|
Labor
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$100
|
$100
|
$100
|
|
Total Unit Cost
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$800
|
$750
|
$700
|
Based on this information should you accept the offer to produce 10,000 PC's at $650 each? Explain.