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Production Economics of Widgets

A widget manufacturer sold 10,000 widgets for $2.50 each. Total fixed costs are $5,000 and variable costs per unit are $.80.

(a) Given this information, what is the total profit for this production run?
(b) Marketing research indicated that the price elasticity demand coefficient for the widgets is 2.5.
(c) The factory wants to increase revenues and profits.
(d) Find the quantity and price point which will maximize profits.

Use table provided to calculate new price points. Add lines as needed.

To get started, what does a coefficient of 2.5 indicate? Is the product price elastic or inelastic?

QTY Unit price Revenues Total fixed costs Total variable cost Total cost Total profit

Current 10,000 $2.50 $5,000
New (1)
New (2)
New (3)
New (4)

Solution Preview

a) Total profit = total revenue - total cost = $2.5 X 10000 - $5000 - $0.8 X 10000 = $12,000

What does elasticity = 2.5 mean? The price elasticity is measures the how much quantity demanded will change if price changes. A good is said to be inelastic if elasticity is less than 1, unit elastic if elasticity = 1 and elastic if elasticity > 1. To get an understanding ...

Solution Summary

Economics for a widget manufacturer is analyzed. The total profits for a production run is calculated. The expert finds the quantity and price point for which profits will be maximized.