Flash Flight produces running shorts in a monopolistically competitive market. It sells no shorts at $50 a pair. With their current advertising budget, each $5 drop in price results in an increase of 20 shorts sold per day. If the firm doubles their advertising budget, they can triple the quantity of shorts sold at each price. The firm’s marginal cost is constant at $5 a pair. What quantity of shorts will maximize profits for Flash Flight? The answer is 90 pairs per day. Could anyone explain how? Thanks.
anyone pls…
the question doesnt make a whole lot of sense. where did you get it from? it seems as if the shorts are highly elastic (sorry - little economics joke there)…
It is from Stalla
Economic Profit at 80 units = 2000 80 * 30 = 2400 80 * 5 = 400 Economic Profit at 90 units = 2025 90 * 27.5 = 2475 90 * 5= 450 Economic Profit at 100 units = 2000 100 * 25 = 2500 100* 5 = 500
wow…thank you tlb. Got it.
I am also working with stalla and ran into this Q last week and could not figure it out. Thanks!
dlo…how fast are you going over the passmaster? Are you finding yourself writing lots of notes?. what is your strategy going over passmaster?
easy one x=Number of times you give the $5 drop in price Price=50-5x Q=20x Cost= 5*Q=100x Profit=P*Q-C=(50-5x)*20x-100x = 1000x-100x^2-100x = 900x-100x^2 Now to find the maximum x, get the first-order derivative and equal the equation to 0 P’=900-200x=0… x=4.5 Finally Q=20*4.5=90
easy indeed…
How could we resolve this exercise using the marginal approach instead ?
Sorry for being dumb but can anyone please let me know how come price 30 being derived for each short when quantity is 80 and doesn’t the question itself says that if Price is less than $50, no sell happens -------------------------------------------------------------------- Economic Profit at 80 units = 2000 80 * 30 = 2400 80 * 5 = 400 Economic Profit at 90 units = 2025 90 * 27.5 = 2475 90 * 5= 450 Economic Profit at 100 units = 2000 100 * 25 = 2500 100* 5 = 500 -----------------------------------------------------------------------------------
if price is $50 OR MORE there are none sold. People are likely to buy more as you reduce your price. For every $5 reduction from $50, you sell 20 more. So at 90 pairs of shorts, the price has been dropped 4.5 times (80 would be 4 times since each increment is an increase of 20). 4.5 drops in price * $5 price each time = $22.5. So total price is $50 - $22.5 = $27.5. Since marginal cost is constant at $5, cost is 90 * $5 = $450.