Ashford Bus 640- Assignment Week 4

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Please, complete the following 2 applied problems in a Word or Excel
document. Show all your calculations and explain your results. Submit
your assignment in the drop box by using the Assignment Submission

Week 4 Assignment Study Guide

  1. A small business which produces plastic
    vacuum-suction covers for round household dishes has a monopoly that is
    protected by a utility patent. The market demand curve for this product
    is estimated to be:  Q = 6009 – 25P where Q is the number of plate covers per year and P is in dollars.  Cost estimation processes have determined that the firm’s cost function is represented by TC = 120 + 2500Q -0.25*Q2

    (i)  What
    is the profit-maximizing price and output level? Solve this
    algebraically for equilibrium P and Q and also plot the MC, D and MR
    curves and illustrate the equilibrium point.

    (ii)  What profit do you expect that the firm will make in the first year?

    (iii)  Do you expect this profit level to continue in subsequent years? Why or why not?

  2. Greener Grass Company (GGC) competes with its main rival, Better
    Lawns and Gardens (BLG), in the supply and installation of in-ground
    lawn watering systems in the wealthy western suburbs of a major
    east-coast city. Last year, GGC’s price for the typical lawn system was
    $1,995 compared with BLG’s price of $2,100. GGC installed 9,130 systems,
    or about 55% of total sales and BLG installed the rest. (No doubt many
    additional systems were installed by do-it-yourself homeowners since the
    parts are readily available at hardware stores.) GGC has substantial
    excess capacity—it could easily install 25,000 systems annually, as it
    has all the necessary equipment and can easily hire and train
    installers. Accordingly, GGC is considering expansion into the eastern
    suburbs, where the homeowners are less wealthy. In past years, both GGC
    and BLG have installed several hundred systems in the eastern suburbs
    but generally their sales efforts are met with the response that the
    systems are too expensive. GGC has hired you to recommend a pricing
    strategy for both the western and east¬ern suburb markets for this
    coming season. You have estimated two distinct demand functions, as

    Qw = 1,035.548 – 6.07164Pgw  + 2.83Pbw + 2,100Ag – 1,500Ab + 0.2348Yw

    for the western market and

    Qe  = 49,714.29 – 30.7692Pge + 6.984Pbe + 1,180Ag – 950Ab + 0.0825Ye

    for the eastern market, where Q refers to the number of units
    sold; P refers to price level; A refers to advertising budgets of the
    firms (in millions); Y refers to average disposable income levels of the
    potential customers; the subscripts w and e refer to the western and
    eastern markets, respectively; and the subscripts g and b refer to GGC
    and BLG, respectively. GGC expects to spend $1.5 million on advertising
    this coming year and expects BLG to spend $1.2 million on advertising.
    The average household disposable income is $55,000 in the western
    suburbs and $25,000 in the eastern suburbs. GGC does not expect BLG to
    change its price from last year, since it has already distributed its
    glossy brochures (with the $2,100 price stated) in both suburbs, and its
    TV commercial has already been produced. GGC’s cost structure has been
    estimated as TVC = 755.363Q + 0.005Q2 where Q represents single lawn watering systems.

    a.  Derive the demand curves for GGC’s product in each market.

    b.  Plot
    graphically the demand and MR curves for each market, and also show
    GGC’s combined marginal revenue curve (MR) and its MC curve. Show
    graphically the quantities that should be produced and sold, and the
    prices that should be charged, in each market.

    c.  Confirm your quantity and price results algebraically.

    d.  Calculate
    the price elasticities of demand in each market and discuss these in
    relation to the prices to be charged in each market.

    e.  Add
    a short note to GGC management outlining any reservations and
    qualifications you may have concerning your price recommendations.


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