A firm introduced a new product to the market in the first month of the year which supported with the corresponding advertising campaign and showed their steady growth next months. The starting price was set at a level of 30% above the average cost (AC). The company's objective is to cover its overheads and achieve maximization at profits and therefore wonders if the price of €7.5 is optimal. With continuous development of sales the company conducted market research and found that elasticity demand to price is −3. The formula for calculating the elasticity of demand is given to the value: eP = [-AC/(P-AC)] - 1 Sales (tons) and costs (thousand euros) for the next 3 months are estimated as follows: Sales (volume) Raw materials Labor Administrative expenses Electricity - Heating JANUARY Other general expenses total EXPENSES 2,250 €1,400 Other industrial costs €3,000 €3,350 €2,150 €450 €2,250 €12,600 FEBRUARY 2,500 €1,550 €4,050 €3,075 €2,150 €475 €2,200 €13,500 MARCH 2,750 €1,700 €4,950 €3,150 €2,150 €300 €2,200 €14,450 a) Assuming that the price can vary, calculate the price per month. b) What markup rate is extracted for each month?

A firm introduced a new product to the market in the first month of the year which supported with the corresponding advertising campaign and showed their steady growth next months. The starting price was set at a level of 30% above the average cost (AC). The company's objective is to cover its overheads and achieve maximization at profits and therefore wonders if the price of €7.5 is optimal. With continuous development of sales the company conducted market research and found that elasticity demand to price is −3. The formula for calculating the elasticity of demand is given to the value: eP = [-AC/(P-AC)] - 1 Sales (tons) and costs (thousand euros) for the next 3 months are estimated as follows: Sales (volume) Raw materials Labor Administrative expenses Electricity - Heating JANUARY Other general expenses total EXPENSES 2,250 €1,400 Other industrial costs €3,000 €3,350 €2,150 €450 €2,250 €12,600 FEBRUARY 2,500 €1,550 €4,050 €3,075 €2,150 €475 €2,200 €13,500 MARCH 2,750 €1,700 €4,950 €3,150 €2,150 €300 €2,200 €14,450 a) Assuming that the price can vary, calculate the price per month. b) What markup rate is extracted for each month?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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