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A big ads agency normally sells 1 million of ads at $100 per ad. 1) Suppose...

A big ads agency normally sells 1 million of ads at $100 per ad.

1) Suppose its variable cost is $20 per ad, the company is considering to reduce the price by 10%. After the price change, how many units does the company have to sell in order to maintain the same profit level as before?

2) Suppose its variable cost is $20 per ad and the price elasticity is −1.5. The company is deciding whether to increase or decrease the price by 10%. Should the company increase or decrease the price by 10%? How about increase or decrease the price by 15%?

3) Suppose its variable cost is $60 per ad and the price elasticity is −1.5. The company is deciding whether to increase or decrease the price by 10%. Should the company increase or decrease the price by 10%? How about increase or decrease the price by 15%?

4) What do you observe based on 2) and 3)? Using your own words and intuition, why does the variable cost matter when considering to increase and decrease price?
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Answer #1

Total Sales milkion xo T0pesad 1 (NRiableas mkn x 20/ad Profst= 8omen sane pfit of Zamn by decreaging the price as fallows- T

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