Assignment

View spreadsheet file with (simulated) data that would come from a monopolist's market experiment. Using your data, you must:

• Estimate the demand curve from the data provided. Use regression analysis to estimate quantity demanded as a function of the price.

• Estimate the monopolist's cost function. Again, use regression analysis and the data provided.

• Develop a price recommendation that will maximize profits, assuming that market conditions and production technology remains the same.

• Develop an alternate price recommendation based on a different, forecasted cost structure. More specifically, propose a profit maximizing price if soon the cost structure will feature a fixed cost of $3,200,000 and a constant marginal cost of $7 per unit of output.

• State your recommendations and explain how you arrived at them. (More detailed requirements for the written report are given below.)

The written report should be 3-5 pages in length (including any graphs, calculations, or tables). It should not have a cover page. It should have four sections:

1. Introduction or Executive Summary - In one to two paragraphs report your price recommendations and provide a concise summary of the procedure you used to arrive at them.

2. Demand estimation - Explain briefly the concept of a demand curve and how the market experiment allows it to be known. Explain the procedure in estimating it. State your estimated demand curve. Discuss how well regressions fit the data and give a warning on when your estimates should or should not be used.

3. Cost estimation - Explain how you estimate costs. Show total costs as function of output quantity, and comment on how closely it fits the data. Discuss what marginal costs you estimate and why they might differ from the wholesale cost of inputs. Discuss what might render your estimates obsolete.

4. First price recommendation - Present your recommendations for a profit-maximizing price under the assumption the market conditions and production technology remain stable. Forecast revenue and profits at that price.

5. Second price recommendation - Present your recommendations for a profit-maximizing price assuming costs change as forecasted. Give revenue and profit targets.

6. Conclusion

Assignments must be typed, professional looking, carefully edited, and follow the requirements of the assignment. Explanations should be of such depth and quality that a boss or graduating business major would have confidence in your recommendations.

Because each student has a unique data file, estimation results will also be different. The written explanations must be you own. Classmates and anyone else may proofread. Acknowledge all help you have received in an endnote.