EXERCISES

Based upon the assumptions provided in the first Homework assignment:

1. Calculate Price Elasticity, where p = $50, Q = 50, Price Elasticity = |?|; p = $75, Q = 25, Price Elasticity = |?|; p = $25, Q = 75, Price Elasticity = |?|

2. Calculate Price Elasticity, where p = $66.67, Q = 33.33, Price Elasticity = |?|

3. Using the inverse elasticity rule (Ramsey optimal pricing): p-mc/p = 1/|Price Elasticity| = calculate the optimal markup where Price Elasticity is |2| and marginal cost is $33.33

Based upon BIRCH PAPER (handed out in class) and the following assumptions, Thompson Division is a price setter facing a linear demand schedule and constant incremental or out-of-pocket costs, other Birch divisions are price takers, perceived incremental cost = MC, Thompson is maximizing contributions to overheads at a price of $480, and finally Thompson would sell 10K units per month at this price, where one unit is a thousand boxes.

4. Calculate the price elasticity of demand for Thompson's product, where p-mc/p = 1/|Price Elasticity| and p = $480 and mc = perceived incremental cost when Birch's divisions transfer materials to each other at market prices. Hint, Thompson Division's MC (supply) schedule = incremental cost.

5. Calculate and draw Thompson Division's demand and supply schedules, its marginal revenue schedule, and its contributions to overheads at the profit maximizing price of $480. Hint: 480/(480-Pmax) = price elasticity of demand (from question 4) and Pmax is the vertical intercept of Thompson Division's demand schedule. Show price and quantity.

6. Calculate Thompson Division's optimal price when Birch's divisions transfer materials to each other at their incremental cost. Draw Thompson Division's demand, MR, and supply schedules under this assumption, show optimal price and quantity.

7. Calculate the total annual reduction in contributions to Birch's overheads that result from transfering materials to Thompson Diviision at market rather than at incremental cost.