10, rT *12, Summary 43 where 1 is the introduction date (in months from now). Some executives have argued for an expedited introduction date, 12 months from now (¢ = 12). Do you agree? What introduction date is most profitable? Explain, As the exclusive carrier on a local air route, a regional airline must determine the number of flights it will provide per week and the fare it will charge, Taking into account operating and fuel costs, airport charges, and so on, the estimated cost per flight is $2,000. It expects to fly full flights (100 passengers), so its marginal cost on a per-passenger basis is $20. Finally, the airline's estimated demand curve is P = 120 -.10, where P is the fare in dollars and Q is the number of passengers per week. a. ‘What is the airline's profit-maximizing fare? How many passengers does it carry per week, using how many flights? What is its weekly profit? b. Suppose the airline is offered $4,000 per week to haul freight along the route for a local firm. This will mean replacing one of the weekly passenger flights with a freight flight (at the same operating cost). Should the airline carry freight for the local firm? Explain, A producer of photocopiers derives profits from two sources: the immediate profit it makes on each copier sold and the additional profit it gains from servicing its copiers and selling toner and other supplies. The firm estimates that its additional profit from service and supplies is about $300 over the life of each copier sold. ‘There is disagreement in management about the implication of this tie-in profit. One group argues that this extra profit (though significant for the firm’s bottom line) should have no effect on the firm’s optimal output and price. A second group argues that the firm should maximize total profit by lowering price to sell additional units (even though this reduces its profit margin at the point of sale). Which view (if either) is correct? ‘Suppose a firm’s inverse demand and cost equations are of the general forms P = a ~ bQ and C= F + cQ, where the parameters a and b denote the intercept and slope of the inverse demand function and the parameters F and c are the firm’s fixed and marginal costs, respectively. Apply the MR = MC rule to confirm that the firm’s optimal output and price are: Q = (a — c)/2b and P = (a + c)/2. Provide explanations for the ways P and Q depend on the underlying economic parameters. Under the terms of the current contractual agreement, Burger Queen (BQ) is entitled to 20 percent of the revenue earned by each of its franchises. BQ’s best-selling item is the Slopper (it slops out of the bun). BQ supplies the ingredients for the Slopper (bun, mystery meat, etc.) at cost to the franchise. The franchisee’s average cost per Slopper (including ingredients, labor cost, and so on) is $.80. At a particular franchise restaurant, weekly demand for Sloppers is given by P = 3.00 — 0/800. ; a. If BQ sets the price and weekly sales quantity of Sloppers, what quantity and price would BQ receive? What is the franchisee’s net profit? ; b. Suppose the franchise owner sets the price and sales quantity. What price and quantity will the owner set? (Hint: Remember that the owner keeps only $.80 of each extra dollar of revenue earned.) How does the total profit earned by the two parties compare to their total profit in part (a)? 20 : ¢. Now, suppose BQ and an individual franchise owner enter into an agreement in which BQ is entitled to a share of the franchisee's profit. Will profit sharing remove the conflict between BQ and the franchise operator? Under profit sharing, what will be the price and quantity of Sloppers? (Does the exact split of the profit affect your an- swer? Explain briefly.) What is the resulting total profit? d. Profit sharing is not widely practiced in the franchise bt sharing? it set? How much does ss. What are its disadvantages relative to revenue Discussion Question As vice president of sales for a rapidly growing company, you are grappling with the question of expanding your direct sales force (from its current level of 60 national salespeople) by hiring 5 to 10 additional personnel. ow would you estimate the additional dollar cost of each additional salesperson? Based on your company’s past sales expericnce ow would you estimate the expeced net revenue generated by an adiinal salesperson? (Be specific about Face fon you might vse to derive tis estimate.) How would you use these cost and revenue estimates to determine whether a sales force increase (or possibly a decrease) is warranted? **Starred problems are more challenging,