Question 1

Craig's Red Sea Restaurant is currently the only restaurant in Columbia, South Carolina, that sells Ethiopian food. Graig's advisors estimate that the demand for Ethiopian food in South Carolina is given by:

Q = 25 - P

Where P is the average price of a meal and Q is the quantity of meals. Craig's costs are estimated with the following equation:

TC = 25 + Q + 5Q2

a. Given this information, how much output should Craig's produce to maximize profits?

b. How much should it charge for each meal? Is Craig's restaurant making a profit? If yes, how much?

c. Without doing any calculations, if you were Craig's advisors, what would you recommend they do to improve their profits ?

d. Suppose that price discrimination was an option available to Craig's? What would Craig's need to do to be able to practice first degree price discrimination?

Question 2

The Allen Corporation, a sofa retailer, wants to determine how many sofas it must sell in order to earn

a profit of $15,000 per month. The price of each sofa is $500, the average variable cost is $150. What

is the required sales volume if fixed costs are $4000 per month?

Question 3

When producing 20 units, Tom has total variable costs of $200, total fixed costs of $100, and assets of $2000. Assume you can approximate MC with AVC.

a. If he he wants a return of 7%, what price should she charge?

b. Suppose that instead of determining price based on his target return, Tom decides to use a standard markup pricing scheme. What is the optimal markup for Tom if she estimates that the price elasticity

of demand for his product is -2?

c. If he uses the optimal markup obtained in part b, how much should he charge for his product?

d. Given your answers to parts a and c, which pricing mechanism should he chose? How would your answer change if the price elasticity for his product increases considerably due to an increase in the

availability of substitutes.

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