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Xerox machine lease

1. The Beaverdam Run Condominium Association has an office Xerox machine. Six months ago, the Association signed a one-year lease for the machine. Six monthly payments remain on the lease at $100 per month. The Association also pays a fee of $0.07 per copy and makes 2,000 copies per month. The lease terms state that cancellation of the lease would cause a cancellation fee equal to what continuing the lease would have cost - i.e., monthly payments would be the same whether the Association were to finish out the lease or were to cancel it. The Copier Committee has now discovered that a Ricoh copier is available that has comparable performance and has a fee of $0.02 per page. Ricoh offers a 6-month lease for $95 per month. If your objective is to minimize the Association's total cash expenses for the next six months, do you continue using the Xerox machine or switch to the Ricoh machine and pay the penalty for cancelling the Xerox lease? Explain. (Suggestion: set up a table with the various components of costs.)

2. A recent Economist magazine article reported that the movie industry has been experiencing a decrease in the number of theater tickets sold, but that revenues have been stable because ticket prices have increased. Would you conclude that the elasticity of demand for theater tickets is elastic, inelastic, or unitary elastic?

Solution Preview

Dear Student:

Q1. Beaverdam Run Condominium Association copy machine.

Option A Xerox Option B Ricoh

Lease 6*100 = $600 6*95 = $570
Copies 2000*6*$0.07 = $840 2000*6*$0.02 = $240
Penalty $0 6*100 = ...

Solution Summary

This first part of this solution compares and chooses the less expensive of two options: to lease Xerox copy machine or Ricoh copier, using the information given in the problem. The second part of this solution discusses the elasticity of demand for movie theater tickets.