Answer to Question #13071 in Economics of Enterprise for Muna
result of rising foreign imports. In order to increase sales (and hopefully, profits), the firm is
considering a price reduction on luranium - a metal that it produces and sells. The firm currently
sells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs of
producing luranium are $250,000. Current variable costs per pound are $5. The firm has
determined that the variable cost per pound could be reduced by $0.50 if production volume
could be increased by 10 percent (fixed costs would remain constant). The firm's marketing
department has estimated the arc elasticity of demand for luranium to be -1.5.
(a) How much would Superior Metals have to reduce the price of luranium in order to achieve
a 10 percent increase in the quantity sold?
(b) What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and
after the price cut?
Total Revenue = 60,000 * $10 =$ 600,000
Total Cost =$250,000 +$5*60,000=$ 300,000
Total Profit = $ 600,000-$ 300,000 =$ 300,000
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