Business Economics Assignment

Business economics assignment

Part A

1. Many firms have similar cost structures, it might be possible to predict the prices of other competing organizations. Also cost plus pricing is simple to compute.

Markup= (price-cost)/ cost price= cost (1+markup)

P= Lab+ Mat+ Mkt+ F/Q+Z*A/Q

Q: planned output A: gross operating assets Z: desired profit rate

MR=P/ (1+1/Z) if firm is maximizing profit: MC=MR=P/ (1+1/Z)

P= MC* [1/ (1+ 1/Z)]

So profit maximizing price is a mark up on marginal cost depending on demand elasticity. If AC closes to MC, then close to max.

2. The potential problem of cost plus pricing is that the supplying division may have the opportunity to pass on operating inefficiencies to the purchasing division in the form of higher prices where no predetermined cost is agreed between divisions, this problem can arise in the short-term as well as the longer term. As the amount of profit for the supplying division is determined by the amount of cost incurred, this can lead to a situation where the division can actually increased its profit through greater inefficiency. The purchasing division must bear the burden of any increased costs in the supplying division and, unless these costs can be passed on to customers in the form of higher prices, profit of purchasing division will be reduced.

3. The price increasing means cost increases. In this contract supplying division is free to choose the quantity of labor, but wage and benefits are specified. Bhagat agreed to a 30 percent raise for workers, it against the contract. So Gina can negotiate the minimum volume of purchasing with Bhagat.

Part B

1. a. Current Average Product =Total product/quantity of input= (25Ð"--25Ð"--40)/25=1,000

Assume 1 unit increase in machines: Q=25Ð"--25Ð"-- (40+1) =25625,

So Current Marginal product =25Ð"--25Ð"--41-25Ð"--25Ð"--40=625

b. With increasing returns to scale, a 1 percent change in all inputs results in a greater than 1 percent change in output. Assuming 100 workers and 100 machines produce 250000 guns. While 101 workers and 101 machines produce 255025, a 2 percent increase in output.

c. Total cost: 25Ð"--3000+40Ð"--6000= 99000