Market Structure And Firm Strategy

Assume that you have decided to start your own Internet business to sell cookbooks online (justcookbooks.com). You estimate that the annual cost of this business in the first year will be as follows:

Fixed explicit costs (annually):

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  • Technology (Web design and maintenance)   $5,000
  • Postage and handling                                   $1,000
  • Miscellaneous                                              $5,000
  • Equipment                                                  $4,000
  • Overhead                                                    $1,000

TOTAL Explicit Fixed Costs (annual)                         $16,000

Fixed implicit costs (annually):

  • Lost wages from job given up (annual)           $50,000

Variable cost = $20 per book.

Part 1:
Assume that the equation for demand is Q = 40,000 – 500P, where

  • Q = the number of cookbooks sold per year
  • P = the retail price of books

Using the information above, fill in the attached chart (note that quantity is just the solution of the demand curve above; the first two lines of the table have been completed for you – you need to complete all other lines in the table):

Indicate the maximum profit price and quantity by highlighting those particular values with red font.

Part 2:
After you complete the chart (either fill in the empty boxes in the table above or create an Excel file), copy and paste the table into a Word file. This table should be at the top of your assignment. Then answer the following questions (based on the chart and your understanding of this material) in 600-800 words:

  1. Why, according to an economist, should implicit costs (i.e., lost wages from job given up) be included in the total cost of your product to compute economic profit?
  2. Why does price elasticity of demand change as you move up the demand curve (more specifically, as the price of the product increases)?
  3. Explain in your own words why MR = MC produces maximum profit for a company.

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