Question

This is one big question with different parts!

I expect to need four turkeys to feed my 20 Thanksgiving guests. However, spiking the eggnog (adding alcohol) with bourbon will induce my Thanksgiving guests to eat 25% less turkey. Turkeys cost $30 each, and the bourbon needed costs $20. How much money do I save if I spike the eggnog? A. $0 B. $10 C. $30 D.$120

How cheap would turkeys have to be (per turkey) for me to not have the incentive to spike the eggnog? A. free B. $10 C. $15 D. $20

A monopoly retailer makes a 50% margin on the $30 turkeys. Is there a price for the bourbon that the retailer can set (for the amount of bourbon needed to spike the turkeys) such that I will purchase the bourbon and the retailer will want to sell it, if the wholesale price of the bourbon is $10? (Assume the only added value from spiking the eggnog is from the reduced cost of turkey and that this type of bourbon is only used to spike eggnog).

Yes No

Answer 1

a.Cost of bourbon needed for four turkeys =20

No of turkeys consumed by guests =4 turkeys

No of turkeys consumed by guests with spiking =25% less than without spiking=0.75*4=3 turkeys

Cost savings with spiking =Cost of 4 turkeys-(Cost of 3 turkeys+Cost of bourbon)=120-(3*30+20)=10

b.

Cost savings should be equal to zero ,to not have the incentive to spike the eggnog.

i.e from the previous problem,

Cost of 4 turkeys-(Cost of 3 turkeys+Cost of bourbon)=0

Cost of 4 turkeys=Cost of 3 turkeys +Cost of bourbon

Cost of 4 turkeys=Cost of 3 turkeys+20

Let cost of turkey=c

substituting in the previous equation,we get

4c=3c+20

c=20

Cost of each turkey=$20(option D)

c.Cost of each turkey=$30

Retailer margin=50% of cost=0.5*30=$15 per turkey

Given,the wholesale price of bourbon=$10

Spiking the eggnog with bourbon leads to 25 % reduction in consumption

i.e Loss to the retailer with addition of bourbon=0.25*30=$ 7.5

Retail price of bourbon per turkey=10+(loss to the retailer with addition of bourbon per turkey*number of turkeys)

=10+(number of turkeys *7.5)

Suppose you buy 1 turkey,Retail price of bourbon =$17.5

Suppose you buy 2 turkeys Retail price of bourbon=$25 and so on.