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Managerial Economics for the El Dorado Star

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The El Dorado Star is the only newspaper in El Dorado, New Mexico. Certainly, the Star competes with The Wall Street Journal, USA Today, and the New York Times for national news reporting, but the Star offers readers stories of local interest, such as local news, weather, high-school sporting events, and so on. The El Dorado Star faces the demand and cost schedules shown in the spreadsheet that follows:

(1) (2) (3)
# of newspaper Total cost per day
per day (Q) Price (P) (TC)
0 0 $2,000
1,000 $1.50 $2,100
2,000 $1.25 $2,200
3,000 $1.00 $2,360
4,000 $0.80 $2,520
5,000 $0.70 $2,700
6,000 $0.60 $2,890
7,000 $0.55 $3,090
8,000 $0.45 $3,310
9,000 $0.40 $3,550

a. Create a spreadsheet using Microsoft Excel (or any other spreadsheet software) that matches the one
above by entering the output, price, and cost data given)
b. Use the appropriate formulas to create three new column (4, 5, and 6) in your spreadsheet for total revenue, marginal revenue (MR), and marginal cost (MC), respectively. (Computation check: At Q = 3,000, MR= $0.50 and MC=$0.16). What price should the manager of the El Dorado Star charge? How many papers should be sold daily to maximize profit?
c. At the price and output level you answered in part b, is the El Dorado Star making the greatest possible amount of total revenue? Is this what you expected? Explain why or why not.
d. Use the appropriate formulas to create two new columns (6 & 7) for total profit and profit margin. What is the maximum profit the El Dorado Star can earn? What is the maximum possible profit margin? Are profit and profit margin maximized at the same point on demand?
e. What is the total fixed cost of the El Dorado Star? Create a new spreadsheet in which total fixed cost increases to $5,000. What price should the manager charge? How many papers should be sold in the short run? What should the owners of the Star do in the long run?

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Solution Summary

This solution shows how to construct a managerial spreadsheet for a small local newspaper. Given data on the paper's demand and cost curves, the spreadsheet shows how to determine the price that will maximize the paper's profits in the short and long run.

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a. See the attached file.
b. Profit increases as long as MR>MC. That's true when Q=5000 but not when Q=6000, so the Star should charge $0.30 and sell 5000 papers.
c. Q=5000 generates maximum profit but not ...

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