Thursday, June 23, 2016

Profit Maximization with Limited Capacity: Ordering a Best Seller

Opportunity costs are important to be taken into consideration while evaluating business decisions for a firm. Need help with economics homework? Let us take an example of the manager working in a bookstore who is in a fix with the number of copies of a new bestseller that he must order. He believes to forecast sales accurately based on previous experience. His estimated equation is P = 24 – Q where
P= price in dollars
Q= quantity of books sold per month in hundreds
The bookstore is known to buy from the publisher at a price of $12 per issue. The following questions must be considered:
1. In case there is plenty of shelf space, how many copies of the book must the store order and how much price should they charge?
2. In case of limited shelf space and an assumption that profit made per copy on the shelf amounts $4, how much should the order quantity and price of bestseller be?
3. Consider that after having received the order for question 2 stated above, the manager finds out that the predicted sales of the bestseller were much higher than actual sales. Actual demand turns out to be P = 18 – 2Q. Now, the manager intends to return a few copies and receive a refund of $6 per book returned. How many copies must he return and consequently how many must be sold? What must the price be? Find economics homework answers below.
Microeconomics assignments state that marginal costs can be used to calculate optimal order quantity. As per question 1, the marginal costs incurred are $12 per book. As per economics assignment help experts, maximization of profit is done by equating MC and MR.
MR = 24 – Q
Therefore, 12= 24 – 2Q, Q = hundred books
P= 24 – 2Q, P = $18 per book
 Question 2 will consider an opportunity cost of $4 along with price of $12. Hence, marginal costs sum up to $16. When MR = MC, the values of Q and P are calculated to be 400 and $20 respectively. 
Because of the absence of unlimited shelf space, the manager would order a lesser number of books than in Question 1, as per assignment help professionals. The probability of having ordered 400 v/s 600 books can be compared using economics coursework. The forgone profit amount is equal to $4 per book. Hence, this proves that ordering 400 books is the more profitable option considering the sunk profit amount on the sales of other bestsellers. According to macroeconomics assignment help experts and the logic of marginal analysis, ordering 400 books is the most profitable and therefore 400 becomes the optimal order quantity. 
Now coming to Question 3, if demand falls to P = 18 – 2Q, economics assignment help experts state that $12 which is the purchase price becomes a sunk cost. Opportunity costs will still hold value. According to university assignment help experts, total sum of opportunity cost = 6 (refund value) + 4 (shelf-space profit) = $10. 
18 – 4Q = 10, Q = 2, 
P= 18 – (2)(2), P = 14
Hence, optimal order quantity is 200 books and price must be $14. Assignment experts state that the remaining books (200 in number) must be returned to claim a refund of $1200.