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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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