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    Calculating the proit levels in the given cases

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    Arrow now sells 100,000 silk shirts at $100 each. The material per shirt costs $40 and labor costs are $50 per shirt. The firm has $1.2m. In fixed costs. Price elasticity of demand for such shirts is -4. The firm is considering lowering the price by 20% to $80. At the higher output, labor cost per shirt is expected to drop by 22% and the raw material supplier will offer a 15% discount on materials.

    a. What is the profit position of the firm at the moment?

    b. Would you advise the firm to cut prices? Why?

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    Solution Preview

    a. Current Variable costs=TVC1=(40+50)*100000=$9,000,000
    Fixed Costs=TFC=$1,200,000
    Total Costs=TFC+TVC1=1200000+9000000=$10,200,000
    Current ...

    Solution Summary

    Solution determines the profit levels in current and proposed scenario. It also determines if the proposed price cut is advisable.