Answer to Question #13071 in Economics of Enterprise for Muna

Question

Superior Metals Company has seen its sales volume decline over the last few years as the
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?
(8 marks)
(b) What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and
after the price cut?
(7 marks)
[TOTAL:

Answer 1

(a) According to elasticity of demand -1.5: It should reduce price for 15% (1.5*10%) in order to achieve 10% increase in quantity


(b)
Total Revenue = 60,000 * $10 =$ 600,000
Total Cost =$250,000 +$5*60,000=$ 300,000
Total Profit = $ 600,000-$ 300,000 =$ 300,000