Project 1 Introduction. Monopolies vs. Perfect Competitor Natural Monopoly vs. Temporary Monopoly - price is determined by company - Examples of each?

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Presentation transcript:

Project 1 Introduction

Monopolies vs. Perfect Competitor Natural Monopoly vs. Temporary Monopoly - price is determined by company - Examples of each? Perfect competitor environment - price is determined by market

Monopoly Assume your company has a temporary monopoly Use the given data to answer 9 questions

Four Functions Demand: Revenue: Cost: Profit:

Demand Function Demand is a downward sloping function Represents price per unit Assume quadratic demand function for project -

Revenue Function Revenue is quantity times price Since demand represents price - Will need to adjust units for project

Cost Function Cost has two components: - fixed cost and variable cost Cost is represented by - Fixed costs incurred before production Variable costs incurred during production

Profit Function Profit equals revenue minus cost Profit is represented by - Ultimate goal is to maximize profit

Project 1 Background Given test market data Assume test markets model a quadratic demand function 8 total test markets (class project has 6) Given cost information Use class techniques to answer 9 given questions

Questions What price should Save-It-All! Put on the drives in order to achieve a maximum profit? 2.How many drives might they expect to sell at the optimum price? 3.What maximum profit can be expected from sales of the SXL? 4.How sensitive is profit to changes from the optimal quantity of drives, as found in question 2?

Questions What is the consumer surplus if the profit is maximized? 6.What profit could Save-It-All! expect if they price the drives at $154.49? 7.How much should Save-It-All! Pay for an advertising campaign that would give a 10% increase in demand? 8.How would the increase in demand from question 7 affect the optimal price of the drives? 9.Would it be wise for Save-It-All! To put $4,000,000 into training and streamlining which would reduce the variable costs by 7% for the coming year?

Helpful Hints Assume you have a temporary monopoly Let your product match test market prices Watch out for units!

Helpful Hints Label all graphs explicitly Clearly indicate answers Finally, be certain that your work is your own

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