BUS 640 Week 4 Assignment

Market Structures and Pricing Decisions Applied Problems.Please complete the following two applied problems:Problem 1:Roberts New Way Vacuum Cleaner Company is a newly started small business thatproduces vacuum cleaners and belongs to a monopolistically competitive market. Itsdemand curve for the product is expressed as Q = 5000 25P where Q is the number ofvacuum cleaners per year and P is in dollars. Cost estimation processes have determinedthat 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 incomplete sentences, whenever it is necessary.a. What are the profit-maximizing price and output levels? Explain them and calculatealgebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginalcost), D (demand), and MR (marginal revenue) curves graphically and illustrate theequilibrium point.b. How much economic profit do you expect that Roberts company will make in thefirst year?c. Do you expect this economic profit level to continue in subsequent years? Why orwhy 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 wealthywestern suburbs of a major east-coast city. Last year, GGCs price for the typical lawnsystem was $1,900 compared with BLGs price of $2,100. GGC installed 9,960 systems, orabout 60% of total sales and BLG installed the rest. (No doubt many additional systemswere installed by do-it-yourself homeowners because the parts are readily available athardware stores.)GGC has substantial excess capacityit could easily install 25,000 systems annually, as ithas all the necessary equipment and can easily hire and train installers. Accordingly, GGCis 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 easternsuburbs but generally their sales efforts are met with the response that the systems are tooexpensive. GGC has hired you to recommend a pricing strategy for both the western andeastern suburb markets for this coming season. You have estimated two distinct demandfunctions, as follows:Qw =2100 6.25Pgw + 3Pbw + 2100Ag – 1500Ab + 0.2Ywfor the western market andQe = 36620 – 25Pge + 7Pbe + 1180Ag – 950Ab + 0.085Yefor the eastern market, where Q refers to the number of units sold; P refers to price level; Arefers to advertising budgets of the firms (in millions); Y refers to average disposableincome levels of the potential customers; the subscripts w and e refer to the western andeastern 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 comingyear and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The averagehousehold disposable income is $60,000 in the western suburbs and $30,000 in the easternsuburbs. GGC does not expect BLG to change its price from last year because it hasalready distributed its glossy brochures (with the $2,100 price stated) in both suburbs, andits TV commercial has already been produced. GGCs cost structure has been estimated asTVC = 750Q + 0.005Q2, where Q represents single lawn watering systems.Show all of your calculations and processes. Describe your answer for each item below incomplete sentences, whenever it is necessary.a. Derive the demand curves for GGCs product in each market.b. Derive GGCs marginal revenue (MR) and marginal cost (MC) curves in eachmarket. Show graphically GGCs demand, MR, and MC curves for each market.c. Derive algebraically the quantities that should be produced and sold, and the pricesthat should be charged, in each market.d. Calculate the price elasticities of demand in each market and discuss these inrelation to the prices to be charged in each market.e. Add a short note to GGC management outlining any reservations and qualificationsyou may have concerning your price recommendations.Reference:Beggs, J. (No Date). Cost Curves Part 2 Average and Marginal Costs. Retrieved fromthe web 24 November 2013 from http://economics.about.com/od/production/ss/CostCurves-Part-2-Average-and-Marginal-Costs_2.htmDouglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: BridgepointEducation.Moffatt, M. (No Date). How to Understand and Calculate Cost Measures Using CostData From a Non-Linear Equation. Retrieved from the web 24 November 2013 fromhttp://economics.about.com/cs/studentresources/a/costs_3.htm