Question 1

Use the following information to answer Questions 7, 8 and 9
A company that produces diet supplements that uses a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment. Total revenue is in thousands of dollars per month. Total cost for the first shift is $200,000 per month - of which $120,000 is labor, $60,000 is other variable costs, and $20,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.2 times the amount paid on the first shift. For the third shift, labor must be paid 1.4 times what it receives in the first shift. 
-Profit will be maximized at which of the following product combinations and number of shifts?

Accepted Answer

A)  one shift producing 100% of A 
B)  one shift producing 25% of A and 75% of B 
C)  two shifts producing 50% of A and 50% of B 
D)  two shift producing 75% of A and 25% of B 
E)  two shifts producing 100% of B

Question 2

A firm produces two products, r and s, and the production process is such that one unit of r is always obtained with one unit of s. The demand curves for r and s are estimated to be: Q_r = 75 - P_r Q_s = 100 - .5P_s and the marginal cost of production is MC = 75 + 4Q_j, where Q_j consists of one unit of each product. a. How much of product r and product s should the firm sell to maximize profits? b. At what price should these products sell?

Accepted Answer

The answer of A firm produces two products, r and...

Question 3

A firm produces two products, x and y, and the production process is such that one unit of x is always obtained with one unit of y. If the demand for x and y are estimated to be:
Qx = 100 - Px so that MRx = 100 - 2Qx)
Qy = 220 - Py so that MRy = 220 - 2Qy)
And the marginal cost of production is MC = 50 + .5Qj, where Qj consists of one unit of each product, how much of product x should the firm sell in order to maximize profit?

Accepted Answer

A)  30 
B)  40 
C)  50 
D)  60 
E)  70

Question 4

A firm produces two products, "r" and "s", and the production process is such that one unit of "r" is always obtained with one unit of "s". If the demand curves for "r" and "s" are estimated to be:
Qr = 75 - Pr so that MRr = 75 - 2Qr)
Qs = 100 - .5Ps so that MRs = 200 - 4Qs)
And the marginal cost of production is MC = 75 + 4Qj, where Qj consists of one unit of each product, how much of product "r" and product "s" should the firm sell to maximize profit?

Accepted Answer

A)  10 
B)  20 
C)  30 
D)  40 
E)  50

Question 5

A firm produces two products, "f" and "g", and the production process is such that one unit of f is always obtained with one unit of "g". If the demand curves for "f" and "g" are estimated to be: Q_f = 300 - P_f so that MR_f = 300 - 2Q_f) Q_g = 400 - 2P_g so that MR_g = 200 - Q_g) and the marginal cost of production is MC = 50 + 3Q_j, where Q_j consists of one unit of each product, how much of product "f" and product "g" should the firm sell to maximize profit?

Accepted Answer

The answer of A firm produces two products, "f" and...

Question 6

Air Comfort Electronics produces small, electric, Victorian-reproduction fans for home and office use. The final product division of the company manufactures all parts of the fan except the electric motor, and then assembles, packages and distributes the product. The fan motors are produced by a separate division of the firm called Westside Armature Works. Westside could sell the motors in the open market to a number of other fan and appliance manufacturers at a standard price of $2.50. There is vigorous competition in the electric motor industry and it is unlikely that, for the size and type motor needed for the fan, any but the going price can be obtained. Management has determined that the demand curve in quantity sold per month for its most popular model, the Casa-Frio model is: Q_c = 8,250 - 100P_c, so that MR_c = 82.5 - .02Q_c) while Air Comfort's marginal cost for the Casa-Frio fan, excluding the cost of the display module is: MC_c = .003_c In addition, management has determined that the marginal cost for the electric motors is: MC_m = .0005Q_m a. At what final product price and rate of output will the firm maximize profit? b. How much of the transfer product should be produced? c. Should the final product division obtain all of its motors for the fan from Westside Armature Works? Why or why not?

Accepted Answer

The answer of Air Comfort Electronics produces small, electric, Victorian-reproduction...

Question 7

Tracey Biogenetics, Inc purchases anti-snoring devices from a manufacturer in China and distributes them to retail stores throughout the United States. Tracey's management has estimated that within the range of feasible prices for the devices, the elasticity of demand of the retail stores is -2.0. If Tracey can obtain any quantity of devices from the manufacturer for a fixed price of $8, answer the following:
a. What will be its profit-maximizing markup percentage?
b. What price should it charge for its anti-snoring devices?

Accepted Answer

The answer of Tracey Biogenetics, Inc purchases anti-snoring devices from...

Question 8

Where there is no external market for a transfer product, the profit maximizing condition for a transfer product firm is:

Accepted Answer

A)  MRF = MCF - MCT 
B)  MRF = MCF + MCT 
C)  MRA + MRB = SMC. 
D)  MRA - MRB = SMC. 
E)  MRF = MCF = MCT

Question 9

Markup on price is the proportion of the cost of goods sold that represents an amount added to that figure to arrive at the selling price.

Accepted Answer

A) True 
 B)False

Question 10

Solis Technology, Inc purchases computer sound systems from a manufacturer in China and distributes them to retail stores throughout the United States. Solis's management has estimated that within the range of feasible prices for the drives, the elasticity of demand of the retail stores is -5.0. If Solis can obtain any quantity of drives from the manufacturer for a fixed price of $18, answer the following:
a. What will be its profit-maximizing markup percentage?
b. What price should it charge for its sound systems?

Accepted Answer

The answer of Solis Technology, Inc purchases computer sound systems...

Question 11

Jasper's is a home cleaning company that specializes in cleaning pet odors and other residual effects of pet ownership. Their primary customers consist of homeowners who own pets and do not want to let Fido's little "deposits" taking over the house Type H) and/or yard Type Y). Both types of customers would purchase both services if they were attractively priced. The maximum amount each type of customer would pay per house and yard cleaning appear on the following table.
  
Jasper's is considering offering its services only as a bundle consisting of both house and yard cleaning. Given the preceding data, what price would you advise the company to charge to the bundle?

Accepted Answer

The answer of Jasper's is a home cleaning company that...

Question 12

Where there is a perfectly competitive external market for a transfer product, the profit-maximizing condition for the transfer product division is met at MRT = PT = MCT.

Accepted Answer

A) True 
 B)False

Question 13

Price discrimination allows different prices for the same product in different markets.

Accepted Answer

A) True 
 B)False

Question 14

QC Electronics produces small, hand-held calculators. The final product division of the company manufactures all parts of the calculator except the display unit, and then assembles, packages and distributes the product. The display units of the calculators are produced by a separate division of the firm called View Displays. View Displays could sell the display units in the open market to a number of other manufacturers at a standard price of $.25. There is vigorous competition in the display unit industry and it is unlikely that any but the going price can be obtained. Management has determined that the demand curve for quantity sold per month of the hand-held calculators is: Q_c = 12,500 - 2000P_c, so that MR_c = 6.25 - .001Q_c) while QC's marginal cost for hand-held calculators, excluding the cost of the display module is: MC_c = .005Q_c In addition, management has determined that the marginal cost for the display modules is: MC_d = .0005Q_d a. At what final product price and rate of output will the firm maximize profit? b. How much of the transfer product should be produced? c. Should the final product division obtain all of its display modules for the calculators from View Displays? Why or why not?

Accepted Answer

The answer of QC Electronics produces small, hand-held calculators. The...

Question 15

Custom Hardwoods produces high quality paneling using a process that also produces large quantities of extremely high quality sawdust. For each pallet of paneling Custom produces one cubic yard of sawdust. The demand for the paneling is: Q_p = 350 - P_p The demand curve for the sawdust, which can be used in various other products, is; Q_s = 25 - .25P_s The total cost function for the two joint products is: TC = 7500 + 2Q + 2Q² a. How much of each product should Custom Hardwoods sell? note - fractional units of the sawdust are permitted.) b. What price should be charged for each product? c. Should Custom Hardwoods withhold any of either products from the market? If so, which one and how much?

Accepted Answer

The answer of Custom Hardwoods produces high quality paneling using...

Question 16

The Bulverde Railroad runs a freight train daily between Brownsville and Bulverde. Two major customers use this service: Texas Spice Distributors and Bulverde Gypsum Company. The demand for freight cars is given by the following equations: P_s = 500 - 8Q_s for Texas Spice Distributors, and P_g = 400 - 5Q_g for Bulverde Gypsum Company. P is the price charged by Bulverde Railroad for hauling one freight car of materials between Brownsville and Bulverde, and Q is the number of cars demanded by each user. Bulverde Railroad's total cost function is given by the following equation: TC = 10,000 + 20Q where Q is the total number of freight cars hauled on a particular trip. If Bulverde Railroad price discriminates: a. What will be the quantity demanded by each customer? b. What will be the prices charged each customer? c. What will be the railroad's total profit?

Accepted Answer

The answer of The Bulverde Railroad runs a freight train...

Question 17

In the case of joint products produced in fixed proportions, each increment of output, Q, consists of a certain amount of each jointly produced product.

Accepted Answer

A) True 
 B)False

Question 18

Where there is no external market for a transfer product, the profit maximizing condition for transfer product firms is MRF = MCF + MCT.

Accepted Answer

A) True 
 B)False

Question 19

In a joint product problem with products produced in fixed proportions, profit would be maximized where MRA = MRB = MC, provided that the total of MRA and MRB is positive.

Accepted Answer

A) True 
 B)False

Question 20

Joe "Mr. Clean" Smith is planning to start a new service for his car wash company. Previously, everyone who wanted their car washed had to come to Joe's business Mr. Clean Car Wash. He and his staff have decided that there is a substantial market for people who would want to have their car washed at their home. After considerable, and I might add free, market research performed by the Small Business Development Center of the University of Texas at San Antonio, the following daily demand equations have been determined. The estimated demand for car washes done at Mr. Clean is given by the following equation: Q_c = 550 - 25P_c, so that MR_c = 22 -.08Q_c The estimated demand for car washes done at home is given by the following equation: Q_h = 95 - 2.5P_h, so that MR_h = 38 - .8Q_h, where Q_c is the number of car washes per day done at Mr. Clean and Q_h is the number of cars washes done at people's homes. Because he is only sending one person out to do the cars washes at home and he does not have to pay for water, Joe estimates that the marginal cost for both in-house and at-home car washes to the same and is constant at $6.00 a. Should the price for picked up in-house car wash be lower than the price for the at-home one? b. How many car washes should be sold in each market to maximize profit? c. What price or prices should be charged each type of customer?

Accepted Answer

The answer of Joe "Mr. Clean" Smith is planning to...

Exam 11: Topics in Pricing and Profit Analysis

Where there is no external market for a transfer product, the profit maximizing condition for a transfer product firm is:

Markup on price is the proportion of the cost of goods sold that represents an amount added to that figure to arrive at the selling price.

Where there is a perfectly competitive external market for a transfer product, the profit-maximizing condition for the transfer product division is met at MR_T = P_T = MC_T.

Price discrimination allows different prices for the same product in different markets.

In the case of joint products produced in fixed proportions, each increment of output, Q, consists of a certain amount of each jointly produced product.

Where there is no external market for a transfer product, the profit maximizing condition for transfer product firms is MR_F = MC_F + MC_T.

In a joint product problem with products produced in fixed proportions, profit would be maximized where MR_A = MR_B = MC, provided that the total of MR_A and MR_B is positive.