Purchase Solution

Price Elasticity of Demand and Profit Maximizing Level of Output

Not what you're looking for?

Ask Custom Question

Question: In 1991, Brazil and Columbia united to form a coffee cartel and reduce coffee output. Suppose total costs for the cartel are: TC = 12 + 5Q + Q2

Here Q is millions of pounds of coffee.

The market demand curve for coffee is: P = 17 - Q

Here P is millions of dollars per million pounds. Suppose before the cartel was formed, output was 11 million pounds.

In the Wall Street Journal a Columbian delegate to the cartel said that he believed that if the cartel reduced coffee output by 10%, the price would rise by 20%.

Questions:
a. Before the cartel was formed, What did the Columbian delegate believe was the price elasticity? What was the actual price elasticity before the cartel was formed?
b. Compute the profit maximizing level of coffee output, the price the cartel should charge, the maximum cartel profits, and the price elasticity at the optimal output.

Purchase this Solution
Solution Preview

Solution:

a)
According to the Columbian delegate:
% change in price=20%
% change in quantity=-10%
Price elasticity of demand=% change in quantity/ % change in price = -10%/20% = -0.5

Calculating actual Price elasticity:
Demand is given by relation
P = 17-Q
Or Q = 17-P
dQ/dP = -1
Price elasticity of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Analyising Monopolist's demand and cost functions

    c) What is the price elasticity of demand faced by this monopolist d) What happens to the profit maximizing level of output as s increases e) What happens to the profit maximizing level of output as a increases.

  • Calculating profit-maximizing price and output

    ) Price elasticity of demand=(dQL/dPL)*(PL/QL)=-2500*(35/37500)= -2.33333 The solution describes the steps to calculate profit-maximizing price, output, total profit contribution levels and associated price elasticity of demand.

  • BASE CASE

    At this price and quantity level, revenue= P*Q = 8500*15.5 = 131,750 VC = $59,500 TC = $129,500 • Determine the elasticity of demand at the profit maximizing price and discuss the meaning and importance of price elasticity.

  • Calculating profit maximizing output and elasticity

    (a) If the firm can sell any output at a price equal to 10, if the wage rate per unit of labor is 8 and the rental per unit of capital is 80, what is the profit maximizing level of output?

  • Mathematical economic solutions via lagrange method and algebra

    In the third I determine the output and price decisions of a monopolist producing two goods and find elasticity of demand given demand functions and cost functions.

  • Steps to finding the optimal output and price levels

    What is the maximum profit? i. If average total cost does not change when output increases to 535, what price maximizes profit? a. What is the price elasticity of demand?

  • Finding the optimal price and output levels

    Online Stores 2.3 Which market has a more elastic demand? 2.1 What is the profit maximizing price level in each market?

  • Finding optimal output and price levels

    The profit maximizing output for your firm is one of the following: 4/5 10 5 45 Suppose a monopolistic knows the own-price elasticity of demand for its product is -3 and its marginal cost of production is constant MC(Q) = 10.

  • economics

    Compute the profit maximizing level of coffee output, the price the cartel should charge, the maximum cartel profits, and the price elasticity at the optimal output. 1.

  • Pricing with marketing power

    The power is zero when the elasticity of demand is maximum and the power is one when the price elasticity of demand is zero. The formula for finding out the Lerner index is (price-marginal cost)/price.

View More Related Solutions