Levels of Flavor
Preferred in Children
All firms are able to
enter and Exit
Free entry & exit
Produce differentiated products.
Freedom of entry and exist.
Impact of elasticity!!!
If demand function is;
Q = 40 – 2P
E = -2(15/10).
E = -3
3> 1 in absolute terms
This shows that the demand of
GOURMET chocolate is highly elastic.
Cost for the maintenance of Labor and
Cost of Labor (variable)
Cost of equipment (fixed)
Wage rate per day = Rs.333
Wage per labor each month = Rs.10, 000
No. of labor units employed = 16
Total cost of labor per month =
Question # 1
At what price Gourmet chocolate
should be sold to maximize profit?
Where MC = MR
Q = 40 – 2P
C (Q) = 4 +0.1 Q2
MC = MR
Q = 20 – Q
Q = 10 gms
P = Rs. 15
At price of Rs.15 Gourmet can maximize its profit.
Question # 2
How does the cost of Dairy milk
chocolate affect sale of Gourmet
We can use Cross price elasticity in order
to know the effect of prices of Dairy milk
chocolate on the Gourmet chocolate
E = %∆ Gourmet / %∆ P Cadbury
Where; E = 3
10% increase in price of Cadbury milk
chocolate causes the increase in quantity
demanded of Gourmet chocolate to 30%.
Question # 3
If a severe snow storm raises the price
of coca beans, should the Gourmet
sell chocolate and if so, at what price?
Price and cost
P > ATC
ATC > P > AVC
P < AVC
Cost before flood C1 = Rs. 14 (according to the given cost function: C = 4 + 0.1Q2)
Cost after flood C2 = Rs. 154 (according to the new cost function: C = 4 + 1.5Q2)
The existing price is Rs.15
The existing revenues are 15 * 10 = Rs.150
New MC = 3Q
MR = 16 – Q
When MC = MR
3Q = 16 – Q
4Q = 16
Q = 16 / 4
Q = 4 gms
P = 20 – 1/2 (4)
P = Rs. 18
This shows that the price will increase Rs.3 more than the previous one.
Now the revenues are (18 * 4) = Rs.72
Question # 4
Can the Gourmet remain competitive if
an overseas chocolate producer pays
30 percent more for cocoa beans but
pays 20 percent less for labor?
• At Rs. 15 per 10 gms of chocolate,
GOURMET chocolate should be sold to
maximize its profit.
• The cost of cadbury Chocolate affect sale
of Gourmet chocolate i.e. 10% increase in
Cadbury Chocolate causes to increase in
quantity demand of chocolate to 30%