In: Economics
After coming up with an innovative idea for a new product, you
paid $4000 to an...
After coming up with an innovative idea for a new product, you
paid $4000 to an industrial designer to draw the blueprints and
found a factory in China that agreed to produce the product for you
for $3 per unit (the price includes the shipping cost from China to
you).
Since this is a totally new and unique product, you have no idea
how the demand for it would be. Therefore, before you start pricing
the product and ordering large amounts from the Chinese factory,
you decide to run an experiment (or a pilot study): you talk to
Target and they allow you to sell your product at 11 different
Target stores for 11 different prices (a different price at each
store). These stores are located in areas whose residents have
similar average income, so you can be certain that price (and not
income) is the only factor varying among these stores.
After 2 weeks, Target sends you the sale numbers for your
product. (use the following data).
Price Quantity Demanded
4 221
5 210
6 185
7 162
8 144
9 122
10 102
11 81
12 61
13 46
14 25
- On a graph (scatterplot), display the price-quantity pairs. Be
careful what variable should be on the vertical axis and which one
on the horizontal axis. (3pts) (Use Excel.)
- Using regression, find the demand line that is the best fit for
the observed data points. (in other words, add a trend line to the
graph you had in part (a)). (2pts)
Write the demand equation in the form of
(3pts)
- What is the R-squared for the previous regression? (1pt)
Given this R-squared, would you say the line is a good fit for the
data points? (2pt)
- Given the demand equation found in part (b), what is the price
elasticity of demand for your product at the price of $7.5?
(3pts)
Does that mean your product is elastic or inelastic at that
price? (1pt)
To increase your revenue, should you set the price above or below
$7.5? (2pt)
- Given the information in the description part, how much are the
total fixed cost (2pts) and the marginal cost (2pts) of
production?
- Given the demand equation found in part (b), if you eventually
decide to sell your product at $8 per unit for the first year, how
many units do you expect to be sold (2pts) and how much will your
revenue (2pts) and profits (2pts) be that year?
- Assume that your product is so unique that it doesn’t have any
close substitutes. Which one best describes the market structure
for your good? (competitive, monopoly, competitive fringe,
oligopoly, monopolistic competition) (2pts)
- Let’s assume the market is a monopoly. Go back to part (b)
where you used regression to find the best fit demand (or trend
line). Add Marginal Revenue (MR) and Marginal Cost (MC) to the
graph and see where the profit maximizing quantity (3pts) and price
(3pts) are in this scenario? (The numbers don’t need to be precise.
Just use the graph and find the approximate price and quantity.
Don’t need to actually include the grap)
- You forgot to file a patent, so after 2 years, many
copycats make products that are somewhat (but not exactly) similar
to yours. What kind of market structure would this be? (2pts)