Monster Bicycle Manufacturing Company

November 15th, 2015

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Monster Bicycle Manufacturing Company
1234 Ghoul Rd.
Underbed, FL 34567
Federated Regulated Economic Associated Consultants
Equilibrium Street
Port Richey, FL 34666
Dear Federated Regulated Economic Associated Consultants (FREAC),
My firm produces bicycles. The market price for the bicycles is currently $500, and we have been producing 13 bicycles per week. I don’t believe that my firm could be doing any better producing any other level of output (we are currently breaking even).
1. I would like for FREAC to look into our production choices and give us its expert opinion as to whether we could improve our weekly profit (see the attached cost schedule). Please include the appropriate graphs in your discussion.
2. Make a supply schedule for my firm by filling out the table below (assume that only whole bicycles can be produced — 9 or 10, not 9.374). What quantity of bicycles should we supply at a market price of $200, $250, $300, $350, $400, $450, $500, $550, and $600 if we want to maximize profits.
Price
$200
$250
$300
$350
$400
$450
$500
$550
$600
Firm Qs (per week)
Our market analysts believe that the demand for bicycles may fall in the near future. Currently, there are 100 firms in the industry that are identical to ours (which means each firm’s supply decision is the same). We predict that, within our short run time frame, market demand will fall to the level indicated by the table below.
Price
$200
$250
$300
$350
$400
$450
$500
$550
$600
Market Qd (per week)
1800
1600
1400
1200
1000
800
600
400
200
Market Qs (per week)
3. What will the new equilibrium market price be if demand falls? Given that new price, how should we react to maximize profit in the short run and the long run? Discuss.
4. Discuss the long run adjustment in the industry. That is, how will the number of firms, market supply, and profitability change as the industry moves toward a new equilibrium (illustrate discussion with the appropriate graphs)?
Please type up a report for us in which you provide an analysis of our situation and discuss the answers to all our questions by the time of our meeting on __(due date)_____. Your payment (grade) will be determined not only by your correctness, but also by the quality of your writing.
Sincerely,
I. M. Scary, President
Monster Bicycle Manufacturing Company
The Monster Bicycle Manufacturing Company sells bicycles in a perfectly competitive market for $500. As part of the project, complete the following table.
Note: Columns 2, 3, 4, and 12 of the table are price specific, meaning if you fill in the table while assuming a market price of $500, columns 2, 3, 4, and 12 will only be valid as long as the market price does not change. Of course, the cost information in columns 5-11 will not be affected by a price change.
1
2
3
4
5
6
7
8
9
10
11
12
Q
Total Revenue
TR=P*Q
Marginal Revenue, TR/Q,
Average Revenue,
TR/Q
TFC
TVC
TC
MC
AFC
AVC
ATC
Profit, =
TR-TC
0
0
2000
1
2000
500
2500
500
2000
2500
2
800
300
1000
400
1400
3
1000
3000
667
333
1000
4
1160
3160
160
500
290
790
5
1340
3340
180
400
268
668
6
3540
200
257
590
7
1780
3780
286
254
8
2080
4080
300
250
510
9
2410
330
222
268
490
10
2770
4770
360
200
277
477
11
3190
5190
420
182
290
472
12
3760
5760
570
167
313
480
13
4500
6500
740
153
346
500
14
5500
7500
1000
143
393
536

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