Crosstraining shoes

[Elliott Le]

Has anyone done this problem? Having a bit of trouble. All I know so far:

1. This problem is about total contribution margin so we need to leave out fixed cost and focus on R - VC. Increasing price will decrease quantity according to demand curve. AVC will increase and revenue will drop. Pricing should be set through marginal analysis.

2. The firm cannot produce until lowest direct unit cost because AVC will exceed the demand curve. Price drop will be greater than the drop in cost.

According to the prof, I'm still not answering the questions.

--
Elliott Le

[Adi Aloni]

Anyone got to this problem?

 

I have a bit of trouble with part c.

 

This is what I have so far:

a.       Relevant cost is $12, set MC=MR => 6 books @ $18 each

 

b.      Relevant cost is $12 + $4 opportunity cost, set again MC=MR => 4 books @ $20 each

 

c.       At the price of $20, she cannot sell any books, and the optimal quantity according to the new demand function with a cost of $16 is 0.5, which doesn’t make sense. Does it mean she has to return all the books?

 

 

Thanks,

Adi.

[Sam]

I haven't done this problem yet, but it sounds very similar to the
example at the beginning of chapter 6 starting on p 212 and finishing
at the end of the chapter.

-Sam

[Carla Nunes]

This problem is on the book as well:

By keeping the best seller represents an opportunity cost of $4 (for using old stocked book) + $6 (refund) = $10

MR = MC
18 - 4Q = 10
Q = 2  => P = 14

So she keeps 200 books and sell them at $14, and returns the other 200 for a refund of $1200.

This is on page 260-261 on old book edition.

[Adi Aloni]

Thanks Carla.

[Gabriel Bowers]

I dropped by Heineke's office today to ask about this question. It turns out that the table in the book is incorrect when calculating the total cost for the last part of the question. 

 

The costs should be:

- $10 ($4 + $6) for the 200x books that are sold.  (C = $2000)

- 0 for the books that are not sold.

Economic Profit = ($14-$10)*200 + ($6 - $0)*200 = $1800

 

Gabriel