Question

General Instructions

The El Dorado Star is the only newspaper in El Dorado, New Mexico. Certainly, the Star competes with The Wall Street Journal, USA Today, and the New York Times for national news reporting, but the Star offers readers stories of local interest, such as local news, weather, high-school sporting events, and so on. The El Dorado Star faces the revenue and cost schedules shown in the spreadsheet that follows:

A template for the spreadsheet is provided in the Course Materials. You may download my template or create your own. Since we are using dollars and cents, be sure to go out two decimal places on your calculations. Add columns to show, respectively, marginal cost (MC), marginal revenue (MR), and total profit.

Place your completed spreadsheet in the Drop Box, and use it to answer the following questions. Submission of your template is worth 10 points and counts 500 words toward your word count requirement.

Your spreadsheet must include formulas showing how you arrived at the calculations. As an alternative, you may also submit a document showing your step-by-step calculations for each of the cells. You will not receive credit if you do not show your work using one of these two methods.

Use the spreadsheet to answer questions 1-6. Explain, in detail, how you arrived at your answers to these questions.

Number of newspapers per day (Q)	Total revenue (including advertising revenues) per day (TR)	Total cost per day (TC)
0	0	2500
1000	4000	2600
2000	5000	2700
3000	5500	2860
4000	5750	3020
5000	5950	3200
6000	6125	3390
7000	6225	3590
8000	6125	3810
9000	5975	4050

Question #1Question #2Question #3Question #4Question

1.

What price should the manager of the EI Dorado Star charge? How many papers should be sold daily to maximize profit?

2.

At the price and output level you answered in the previous question, is the EI Dorado Star making the greatest possible amount of total revenue? Is this what you expected? Explain why or why not.

3.

Use the appropriate formulas to create two new columns (7 and 8) for total profit and profit margin, respectively. What is the maximum profit the EI Dorado Star can earn? What is the maximum possible profit margin? Are profit and profit margin maximized at the same point on demand?

4.

What is the total fixed cost for the El Dorado Star? Explain how you arrived at this conclusion.

Answer 1

(1) Profit is maximized when MR=MC. Based on the calculation, MR and MC are very close to each other at Q = 5000. And corresponding to Q=5000, price = 1.19. Hence, manager of El Dorado should charge a price of $1.19 and the amount of papers which should be sold = 5000.

(2) At Q = 5000 and price = $1.19, the El Dorado is not making greatest possible revenue. No, I was expecting it to be the case, because revenue is maximized when MR = 0, i.e., an additional output does not add to revenue anymore. Since at Q=5000, MR is not zero, the revenue is not expected to be maximized at this level of output. The profit maximization level of output and revenue maximization level of output will be same for the case when MR=MC = 0. This is not the case in the present example and hence the profit maximization level of output and revenue maximization level of output are not same.

(3) The maximum profit El Dorado can earn = 2750. The maximum possible profit margin is 0.48. As observed, profit and profit margin are not maximized at the same point on demand. The respective maximum value are highlighted in yellow.

(4) The total fixed cost for the El DOrado Star = 2500. The variable cost is zero when output is zero and all the cost is considered to be the fixed cost.

_________________________________

The left side table shows the calculated values and the right hand side table shows the formula view of the calculations for your reference.

AB F H Profit Margin TC MR MC Price 0.35 4.00 2.50 0.46 1.83 1000 2000 3000 4000 5000 6000 7000 8000 4000 5000 5500 5750 5950 6125 6225 6125 5975 2500 2600 2700 2860 3020 3200 3390 3590 3810 4050 4.00 1.00 0.50 0.25 0.20 0.18 0.10 -0.10 -0.15 0.10 0.10 0.16 0.16 0.18 0.19 0.20 0.22 0.24 Total Profit -2500 1400 2300 2640 2730 2750 2735 2635 2315 1925 A B C F G H Total Profit QTRTC MR MC Price Profit Margin 2 0 0 2500 =B2-C2 3 1000 4000 2600 =(B3-B2)/($A3-SA2) =B3/A3 =B3-C3 =G3/B3 4 2000 5000 2700 =(B4-B3)/($A4-SA3) =(C4-C3)/($A4-$A3) =B4/A4 =B4-C4 =G4/B4 5 3000 5500 2860 =(B5-B4)/($A5-$24) =(C5-C4)/($A5-$A4) =B5/A5 =B5-C5 =G5/B5 6 4000 5750 3020 =(B6-B5)/($A6-$A5) =(C6-C5)/($A6-$A5) =B6/A6 =B6-C6 =G6/B6 7 5000 5950 3200 =(B7-B6)/($A7-$46) =(C7-C6)/($A7-$A6) =B7/A7 =B7-C7 =G7/B7 8 6000 6125 3390 =(B8-B7)/($A8-$A7) =(C8-C7)/($A8-$A7) =B8/A8 =B8-C8 | =G8/B8 9 7000 6225 3590 =(B9-B8)/($A9-$A8) =(C9-C8)/($A9-$48) =B9/A9 =B9-09 =G9/B9 10 8000 6125 3810 =(B10-B9)/($10-$29) I=(C10-09)/($A10-$49) =B10/A10 =B10-C10 =G10/B10 11 9000 5975 4050 =(B11-B10)/($A11-$A10) =(C11-C10)/($A11-$410) =B11/A11 =B11-C11 =G11/B11 0.48 0.47 0.46 0.45 0.42 0.38 1.44 1.19 1.02 0.89 0.77 0.66 90007 0.32