Group Assignment 3 MAX Total Point Value = 100 (active participants only): Professor Trueman retired from his position at MCC and now runs a Chevy dealership in Bad Axe, Michigan. When he advertised the new Chevy Blazer at $32,000, he sold four cars per week. He then experimented with a discount, cutting the price to $30,000, which led him to sell six cars per week. A further price cut to $28,000 led sales to rise to eight cars. And the week he experimented with a price increase, hiking the price to $34,000, he sold only two cars.
Directions- First make sure that you have practiced 1) setting up a simple table in Excel, using the formula function to automate desired calculations, and 3) using the data to make a simple graph. Practice yourself during the first week, as you make introductions to new group members. No free-hand work, sketches, or photographic images for your final submission.
Part A- Using data from a table, plot the results of Professor Trueman’s pricing experiment to discover his business’s demand curve (MAX: 10 points).
Part B- Use the demand curve data from the spreadsheet to both automatically calculate and plot marginal revenue (MR) with the following steps (MAX: 15 points):
Calculate total revenue (TR) automatically using the formula from your text.
Calculate marginal revenue (MR) automatically using the formula from your text.
Plot and overlay the marginal revenue curve onto the same graph as the demand curve.
Part C- Analyze the demand and marginal revenue curves. Include the following (MAX: 30 points):
What does the Revenue Test tell you about the price elasticity of demand?
Is the marginal revenue curve upward sloping or downward sloping, and why?
Is one curve positioned higher or lower than the other? If so, which one? Would this be a one-time freak occurrence, or would that relationship always exist? Please explain.
Part D- Suppose for simplification purposes, that the marginal cost (MC) and average cost (AC) of selling each additional vehicle is equal to $25,000. Add the data to the spreadsheet table. Then, plot and overlay the MC/AC curve over the same graph used to plot your demand and MR curves (MAX: 5 points).
Part E- Using the graph from Part D, determine how many cars Professor Trueman should sell, and what price he should charge, assuming he has some market power (MAX: 5 points).
Part F- Use Excel, and the general formula for profit in your textbook, to automatically calculate profit at each level of weekly output (sales). Confirm that your completed table has the following seven columns: Quantity, Price, Total Revenue, Total Cost, Marginal Revenue, Marginal Cost, and Profit (MAX: 5 points).
Part G- Determine if you think Professor Trueman is making accounting profit/loss or economic profit/loss. Explain why (MAX: 5 points).
Part H- Suppose some of Professor Trueman’s former colleagues at MCC decide to ‘follow his footsteps’. That is, they move to Bad Axe, MI and open their own Chevy dealerships in the downtown and neighboring area. Analyze how a shift from pricing with market power to one with competition would change outcomes, if at all. The analysis should include the following (MAX: 25 points):
a comparison of the market power price & quantity to price & quantity under competition,
a comparison of consumer and producer surplus (CS and PS) under both market conditions,
a concluding analysis of the welfare effects of monopoly (i.e., would Professor Trueman’s market power be good or bad for the citizens in and around Bad Axe. Explain why.
