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Managerial Economics - 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 revenue and cost schedules shown in the spreadsheet that follows (Please see attached)

Create two new columns, (4) and (5), that show MARGINAL REVENUE (MR goes in column 4) and MARGINAL COST (MC goes in column 5), respectively

Answer the following questions:
1. In your new column 4, what is the value of MR when Q = 8,000?

2. In your new column 5, what is the value of MC when Q = 8,000?

3. How many papers should the manager of the El Dorado Star print and sell daily?

4. In your spreadsheet, create one more new column, column (6), that shows TOTAL PROFIT for each output level. Did your answer in the previous question yield the maximum total profit, as shown in column 6 of your spreadsheet? Yes or NO will be sufficient for this question.

5. How much profit (or loss) will the Star earn?

6. At the profit-maximizing output level you reported in question 3, is the El Dorado Star making the greatest possible amount of TOTAL REVENUE? Is this what you expected? Explain BRIEFLY (but not too briefly) why or why not.

7. What is total fixed cost for Star?

8. If Star's total fixed cost were to DOUBLE for some reason, how many papers should it sell?

9. How much profit does Star make when fixed costs are doubled?

10. If Star's fixed costs double, should it shut down in the short run or continue producing? Explain briefly (One sentence should be sufficient).

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Solution Preview

Note that MR and MC are in units of per thousand Q

1. MR = -100 when Q = 8000

2. MC = 220 when Q = 8000

3. 5000 should be sold. At 6000, MC > MR, so the firm will suffer a loss by producing the 6000th units.

4. Yes

5. 750

6. This is not the maximum possible profit, because the profit maximizing condition MR = MC is not reached. As we can see from the table, ...