A group of five students has decided to form a company topublish a guide to eating establishments located in the vicinity ofall major college and university campuses. In planning for aninitial publication of 6000 copies, they estimate the cost ofproducing the book as follows.Paper$12,000Research2000Graphics5000Reproduction Services 8000Miscellaneous5000Personal Computer2000Desktop Publishing Software500Overhead5500Binding3000Shipping2000One of the students asked the campus bookstore manager toprovide her with historical sales and price data for similarbooks.She estimated the demand for books to be :Q=18500 1000Pwhere Q is number of books sold per year and P is the retailprice of the books.Using the data do the following: A. construct a numerical table for the retail demand curveand plot the numbers on a graph. Calculate the elasticity of demandfor the interval between $12.50 and $8.00.B. do you think the students should follow the bookstoremanagers advice and price their book at $8.75? If you do not agreewith this price, what would be the optimal price of the book?Explain.C. Assuming the students decide to charge the optimal price,do you think they should proceed with this venture?Explain.D. Assuming the students demand equation is accurate; offersome possible reason why the bookstore manager would want to sellthe book at the lower price of $8.75.E. Explain the impact on the optimal price of designating themiscellaneous cost item as fixed versus variable. (Hint: Do thepricing analysis assuming miscellaneous is a fixed cost and compareit with an analysis that assumes it is a variable cost.F. Under what circumstances do you think the average variablecost would increase? Do you think the law of diminishing returnswould play a role in increasing AVC? Explain.G. Under what circumstances do you think the AVC woulddecrease? Explain.
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