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Project 1 Introduction

Project 1 Introduction. Monopolies vs. Perfect Competitor. Natural Monopoly vs. Temporary Monopoly - price is determined by company - Examples of each? Perfect competitor environment - price is determined by market. Monopoly. Assume your company has a temporary monopoly

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Project 1 Introduction

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  1. Project 1 Introduction

  2. Monopolies vs. Perfect Competitor • Natural Monopoly vs. Temporary Monopoly - price is determined by company - Examples of each? • Perfect competitor environment - price is determined by market

  3. Monopoly • Assume your company has a temporary monopoly • Use the given data to answer 9 questions

  4. Four Functions • Demand: • Revenue: • Cost: • Profit:

  5. Demand Function • Demand is a downward sloping function • Represents price per unit • Assume quadratic demand function for project -

  6. Revenue Function • Revenue is quantity times price • Since demand represents price - • Will need to adjust units for project

  7. Cost Function • Cost has two components: - fixed cost and variable cost • Cost is represented by - • Fixed costs incurred before production • Variable costs incurred during production

  8. Profit Function • Profit equals revenue minus cost • Profit is represented by - • Ultimate goal is to maximize profit

  9. Project 1 Background • Given test market data • Assume test markets model a quadratic demand function • 8 total test markets (class project has 6) • Given cost information • Use class techniques to answer 9 given questions

  10. Questions 1 - 4 • What price should Save-It-All! Put on the drives in order to achieve a maximum profit? • How many drives might they expect to sell at the optimum price? • What maximum profit can be expected from sales of the SXL? • How sensitive is profit to changes from the optimal quantity of drives, as found in question 2?

  11. Questions 5 - 9 • What is the consumer surplus if the profit is maximized? • What profit could Save-It-All! expect if they price the drives at $154.49? • How much should Save-It-All! Pay for an advertising campaign that would give a 10% increase in demand? • How would the increase in demand from question 7 affect the optimal price of the drives? • Would it be wise for Save-It-All! To put $4,000,000 into training and streamlining which would reduce the variable costs by 7% for the coming year?

  12. Helpful Hints • Assume you have a temporary monopoly • Let your product match test market prices • Watch out for units!

  13. Helpful Hints • Label all graphs explicitly • Clearly indicate answers • Finally, be certain that your work is your own

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