Question

The El Dorado Star is the only newspaper in El Dorado, New Mexico. Certainly, the Star competes with The Wall Street Journal, USA Today, and the New York Times for national news reporting, but the Star offers readers stories of local interest, such as local news, weather, high-school sporting events, and so on. The El Dorado Star faces the revenue and cost schedules shown in the spreadsheet that follows: A template for the spreadsheet is provided in the Course Materials. You may download my template or create your own. Since we are using dollars and cents, be sure to go out two decimal places on your calculations. Add columns to show, respectively, marginal cost (MC), marginal revenue (MR), and total profit

Number of newspapers per day (Q)	Total revenue (including advertising revenues) per day (TR)	Total cost per day (TC)
0	0	2500
1000	4000	2600
2000	5000	2700
3000	5500	2860
4000	5750	3020
5000	5950	3200
6000	6125	3390
7000	6225	3590
8000	6125	3810
9000	5975	4050

What price should the manager of the EI Dorado Star charge? How many papers should be sold daily to maximize profit?

At the price and output level you answered in the previous question, is the EI Dorado Star making the greatest possible amount of total revenue? Is this what you expected? Explain why or why not.

Use the appropriate formulas to create two new columns (7 and 8) for total profit and profit margin, respectively. What is the maximum profit the EI Dorado Star can earn? What is the maximum possible profit margin? Are profit and profit margin maximized at the same point on demand?

What is the total fixed cost for the El Dorado Star? Explain how you arrived at this conclusion.

Create a new spreadsheet in which total fixed cost increases to $5,000. What price should the manager charge? How many papers should be sold in the short run?

Answer 1

(i) What price should the manager of the EI Dorado Star charge? How many papers should be sold daily to maximize profit?

From the given data we get,

By selling 5000 copies the manager earns 5950 dollars, hence the price of the newspaper per copy=TR/Q=5950/5000=$1.19

and to maximize profit the manager sells 5000 copies (shown as blue shaded row).

(ii) The greatest possible amount of total revenue the EI Dorado Star can earn is $6225.

But the manager should not expect this revenue because at this TR profit is optimal (maximum).

The maximum profit the EI Dorado Star can earn is $2750 and this is the maximum possible profit margin. But at this profit the profit margin is not maximized.

(iii) The total fixed cost for the El Dorado Star is $2500 because when the output is zero the total cost is $2500.

(iv) When the fixed cost increases to $5,000:

When the fixed cost increases to $5000, the manager should charge=TR/Q=$5950/5000=$1.19 (same as above)

and at this price manager sells 5000 papers in the short run.