Royersford Knitting Mills, Ltd., sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs amount $60,000 and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents.

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The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand with respect prices is estimated at -2.

A. Evaluate the impact of the proposal to cut prices on (i) total revenue, (ii) total cost, and (iii) total profits. B. If coverage variable costs are assumed to remain constant over a 10 percent increase in output, evaluate the effects of the proposed price cut on total profits.

4. Unique Creations holds a monopoly position in the production and sale of magonometers. The cost function facing Unique is estimated to be TC= $100,OOO + 20q A. What is the marginal cost for Unique? B. If the price elasticity of demand for Unique is currently -1.5, what price should Unique charge. C. What is the marginal revenue at the price computed in Part (b)? D. If a competitor develops a substitute for the magnometer and the price elasticity increases to -3.0, what price should Unique charge?

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