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:
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.
Create a spreadsheet, and use it to answer the following questions.
Your spreadsheet must include formulas showing how you arrived at the calculations. Also, submit a document showing your step-by-step calculations for each of the cells.
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 |
- What price should the manager of the EI Dorado Star charge? How many papers should be sold daily to maximize profit?
- 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.
- 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?
- What is the total fixed cost for the El Dorado Star? Explain how you arrived at this conclusion.
- Create a new spreadsheet in which total fixed cost increases to $5,000. What price should the manager charge? How many papers should be sold in the short run?
- What should the owners of the Star do in the long run? Should they produce or shut-down? How do we know?
- Dell Computer Corp., the world’s largest personal-computer maker, is keenly aware of everything its rival PC manufacturers decide to do. Explain why Dell usually reacts more quickly and more substantially to pricing, product design, and advertising decisions made by Hewlett-Packard and Gateway than when these same types of decisions are made by Apple Computer.
- Two firms, Small and Large, compete by price. Each can choose either a low price or a high price. The following payoff table shows the profit (in thousands of dollars) each firm would earn in each of the four possible decision situations:
| Small | |||
| Low price | High price | ||
| Large | Low price | $1,000, $500 | $375, $250 |
| High price | $550, –$100 | $575, –$200 | |
- a) Is there a dominant strategy for Small? If so, what is it? Why?
- b) Is there a dominant strategy for Large? If so, what is it? Why?
- c) What is the likely pair of decisions? What payoff will each receive?
