Step 3: Analyze Cost, Pricing, Elasticity, and the Production Function
In your second week on the job, you’re beginning to realize the responsibilities and complexities of your job, and you’re glad to have completed the supply and demand graph you created. As you come into work, you see a voicemail from flashing on your office phone—it’s Frank:
Voicemail from Frank
“Good morning. I just wanted to say you really did a great job developing that supply and demand graph. I would like it if you could deepen your involvement with this client by applying the concepts of elasticity of demand and elasticity of supply to maximize the ExxonMobil’s profits by solving several cost and revenue functions. These are commonly used in the oil and gas industry and are recognized industry standards.
“Exxon is concerned about a franchisee store in Fitzhugh, Maryland. The owner is having trouble maintaining profits while managing price changes. They’d like MCS to offer advice on price cuts for that franchise and determine the individual station’s profit maximizing price using the production function.
“I’ll provide with data that describes the gas station franchise operations and competition. You can find this data in the Profit Maximization worksheet of the Project 1 Excel Workbook you used in the last assignment (Step 2). Complete the tables in that file and answer the client’s questions about price elasticity of demand, the impact of price cuts on revenue, and the profit maximizing price.
“The embedded tables show the quantity of gallons of oil sold by the franchise as well as the price per gallon. You’ll need to solve for marginal cost (MC), total revenue (TR) and marginal revenue (MR), and profit using the formulas provided in the worksheet. To complete the profit maximization calculations correctly, it is important for you to understand how to calculate average total cost and opportunity cost.
“Finally, I’d like you to calculate the profit maximizing price by using the profit maximization formula. This information will help you determine the appropriate price per gallon of oil to achieve maximum profits for the client.
“Please reach out if you have any questions. Thanks so much.”
Access the data and read the instructions within the Profit Maximization worksheet of the Project 1 Excel Workbook to complete this assignment. When you have finished answering the questions, post the workbook to the submission folder located in the final step of this project. Complete this task during Week 2.
Now that you have completed Step 3, proceed to Step 4, where you will discuss pricing strategies.