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Basic concepts in economics

Wyandotte Chemical Company sells various chemicals to the automobile industry. Wyandotte currently sells 30,000 gallons of polyol per year at an average price of $15 per gallon. Fixed costs of manufacturing polyol are $90,000 per year and total variable costs equal $180,000. The operations research department has estimated that a 15 percent increase in output would not affect fixed costs but would reduce average variable costs by 60 cents per gallon. The marketing department has estimated the arc elasticity of demand for polyol to be -2.0.

a) How much would Wyandotte have to reduce the price of polyol to achieve a 15 percent increase in the quantity sold?
b) Evaluate the impact of such a price cut on (i) total revenue, (ii) total costs, and (iii) total profits.

Solution Preview

a) How much would Wyandotte have to reduce the price of polyol to achieve a 15 percent increase in the quantity sold?

Percent change in quantity sold=+15%
Arc elasticity of demand=-2.0
Percent change in price=Percent change in quantity sold/arc elasticity of demand=15%/(-2)= -7.50%
Price should reduce by 7.5%

b) Evaluate the impact of such a price cut on (i) total ...

Solution Summary

Solution describes the steps to calculate needed reduction in price to achieve a given target of increase in quantity sold. It also studies the impact of such price change on total cost, total revenue and total profit.

$2.19