New Way Vacuum Cleaner Company is a newly started small business that produces v Show more Problem 1: Roberts New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firms cost function is represented by TC = 1500 + 20Q + 0.02Q2. Show all of your calculations and processes. Describe your answer for each question in complete sentences whenever it is necessary. a. What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then plot the MC (marginal cost) D (demand) and MR (marginal revenue) curves graphically and illustrate the equilibrium point. b. How much economic profit do you expect that Roberts company will make in the first year? c. Do you expect this economic profit level to continue in subsequent years? Why or why not? Problem 2: Greener Grass Company (GGC) competes with its main rival Better Lawns and Gardens (BLG) in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year GGCs price for the typical lawn system was $1900 compared with BLGs price of $2100. GGC installed 9960 systems or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.) GGC has substantial excess capacityit could easily install 25000 systems annually as it has all the necessary equipment and can easily hire and train installers. Accordingly GGC is considering expansion into the eastern suburbs where the homeowners are less wealthy. In past years both GGC and BLG have installed several hundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions as follows: Qw =2100 6.25Pgw + 3Pbw + 2100Ag 1500Ab + 0.2Yw for the western market and Qe = 36620 25Pge + 7Pbe + 1180Ag 950Ab + 0.085Ye for the eastern market where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets respectively; and the subscripts g and b refer to GGC and BLG respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60000 in the western suburbs and $30000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2100 price stated) in both suburbs and its TV commercial has already been produced. GGCs cost structure has been estimated as TVC = 750Q + 0.005Q2 where Q represents single lawn watering systems. Show all of your calculations and processes. Describe your answer for each item below in complete sentences whenever it is necessary. a. Derive the demand curves for GGCs product in each market. Derive GGCs marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGCs demand MR and MC curves for each market. Derive algebraically the quantities that should be produced and sold and the prices that should be charged in each market. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to be charged in each market. Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendations. Show less

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