Part 1: First Price Recommendation
Use a regression to estimate total costs as a function of quantity. Use the same data file as in part 1.
Use the cost estimates and the demand estimation from part 1 to find marginal cost and marginal revenue.
Find the profit-maximizing quantity and price. Use the profit-maximizing price as your price recommendation.
Submit your answer and your supporting calculations
Part 2: Written Report
The written report should be 3-5 pages in length (including any graphs, calculations, or tables). It should not have a cover page. It should have the following sections:
- Introduction or Executive Summary – In one to two paragraphs report your price recommendations and provide a concise summary of the procedure you used to arrive at them.
- Demand estimation – Explain briefly the concept of a demand curve and how the market experiment allows it to be known. Explain the procedure in estimating it. State your estimated demand curve. Discuss how well regressions fit the data. Give a warning on when your estimates should not be used.
- Cost estimation – Explain how you estimate costs. Show total costs as function of output quantity, and comment on how closely it fits the data. Discuss what might render your estimates obsolete.
- First price recommendation – Present your recommendations for a profit-maximizing price under the assumption the market conditions and production technology remain stable. Forecast revenue and profits at that price.
- Second price recommendation – Present your recommendations for a profit-maximizing price assuming costs change so that the fixed cost becomes $3,100,000 with constant marginal cost of $6 per unit of output. Give revenue and profit targets.
- Conclusion (optional)
Assignments must be typed, professional looking, and carefully edited. Explanations should be of such depth and quality that a boss or graduating business major would have confidence in your recommendations.