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Trade volume, AVC & elasticity of cost

Power Brokers, Inc., a discount brokerage firm, is contemplating opening a new regional office in Providence, Rhode Island. An accounting cost analysis of monthly operating costs at a dozen of its regional outlets reveals average fixed costs of $4,500 per month and average variable costs of:
AVC=$59-$0.006Q
Where AVC is average variable cost in dollars and Q is output measured by number of stock and bond trades. A typical stock or bond trade results in $100 of gross commission income, with PBI paying 35% to its sales representative.
A. Estimate the trade volume necessary for PBI to reach a target return of $7,500 per month for a typical office.
B. Estimate and interpret the elasticity of cost with respect to output at the trade volume found in part A.

Solution Preview

A. Estimate the trade volume necessary for PBI to reach a target return of $7,500 per month for a typical office.

For the target return of 7,500 per month, the company has to generate enough revenue to cover fixed costs and the target return.
Fixed costs = 4500 + ...

Solution Summary

The solution discusses each economics question presented. All needed calculations are also included.

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