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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 revenue and cost schedules shown in the spreadsheet that follows:

    (1) (2) (3)
    (Q) (TR) (TC)
    0 0 2000
    1000 1500 2100
    2000 2500 2200
    3000 3000 2360
    4000 3250 2520
    5000 3450 2700
    6000 3625 2890
    7000 3725 3090
    8000 3625 3310
    9000 3475 3550

    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.

    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

    See the attached file.
    1. MR = -0.1
    2. MC = 0.22
    3. Profit increases as long as MR>MC. That's true when Q=5000 but not when Q=6000, so the Star should print and sell 5000 ...

    Solution Summary

    This solution uses cost and revenue data to prepare a spreadsheet for the El Dorado Star, a small local newspaper. It then uses the spreadsheet to make output decisions to maximize the Star's profit.