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In: Economics

QUESTION 5 (20 Marks) M&M Manufacturing Co. supplies automotive parts in three outlets in Denver. The...

QUESTION 5

M&M Manufacturing Co. supplies automotive parts in three outlets in Denver. The inverse demand equations faced by each outlet are as follows:

Outlet 1:          P = 150 – 2.50 Q1

Outlet 2:          P = 200 – 8.40 Q2

Outlet 3:          P = 450 – 0.75 Q3

  1. If the firm charges $100 per unit, determine the quantity demanded by each outlet.
  2. Given the price, compute the own price elasticity for each outlet and identify which outlet is the most responsive to price change. Why?

If M&M Manufacturing Co. plans to increase the price by 10 percent, do you think the Company is making a right decision? Explain your answer.

Solutions

Expert Solution

From the calculation of price elasticity of demand it can be clearly seen that the demand for outlet one is elastic in nature which means price and revenue will moves in opposite direction

if price increases by 10% then total revenue will decrease

for outlet two and three demand is unit elastic so there is no effect on revenue

The company is not making the right decision

Rahul Sunny answered 2 years ago
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