Question

Businesses can buy paper from a retailer like Staples or directly from the paper-factory. Suppose retailers charge a unit price of PR = $100, while paper factories offer quantity discounts and charge a unit price PF = $120 – q for purchases of up to 60 boxes and PF = $60 on larger purchases.

Consider a business that spends $1,100 on paper.

a) Where does this business buy paper? How much paper does the business buy? Discuss.

b) In a diagram, illustrate the business’ optimal choice.

Now consider a business that spends $3,200 on paper.

c) Where does this business buy paper? How much paper does the business buy? Discuss.

d) In a separate diagram, illustrate the business’ optimal choice.

e) Suppose paper factories offer same-day delivery. What is the largest individual order a retailer will ever have to fill? Clearly explain.

f) How does your answer in part e) change if paper factories take 2 or more business days to deliver?

Answer 1

a. There is changes in the charging price of the commodity. Both in retailer and paper factory.

Given situation is that a business spent around $1,100 on paper.

The best option is to purchase from the factory at wholesale rate since the requirement of a factory is in large quantity. And it is mentioned that the retailer charges $100 and tge paper factory offers discount of $120 on purchase of 60 boxes. It totally depends on the requirement of the company the more it will invest on paper the more quantity with less amount would be charged.

b. If we consider that the business is investing $3,200 on paper that means now his choice will fluctuate and will go for more quantity in less amount that is the last option.

c. This is just an assumption:-

If the business buy 60 boxes of paper then the best optimal choice of the firm is to buy at the rate of $120 from paper-factory which is offering a discount too on purchase of boxes upto 60.

d. The best optimal choice of the business is illustrated through a diagram.