1. You have gone to work for Corporal Mills (CM), a large producer of breakfast cereal. On

your first day after orientation, they assign you to work in the department managing a new brand of

cereal that the CM's food engineers have just invented and of which CM is the only producer. Your

marketing department estimates that, without spending anything on marketing, if you priced the cereal

at $2 per box, consumers would want to buy 10,000 boxes a month. If you instead priced at $4 per box

they would want only 8,000 boxes a month. Assuming demand is linear, this means that the monthly

demand curve CM faces is Q = 12000 1000P (or P = 12 Q/1000).

The engineering and finance department have also given you the following information as it relates to

the cost of producing this new cereal. (All costs listed are economic costs, you can assume that these

costs will not increase or decrease based on the number of boxes produced.)

Machinery to produce cereal $8,000 per month

Salaries of manufacturing & warehouse supervisors $20,000 per month

Wages of hourly production employees $0.95 per box produced

Raw materials for cereal $0.30 per box produced

Packaging materials $0.15 per box produced

(a) You're in charge of setting the price for this cereal. What price do you set? How many

boxes will you sell? What will your monthly profits be?

Price =

Quantity =

Profits =

(b) What is the own-price elasticity of demand at the price you found in part (a)?

d =

(c) What is the deadweight loss from monopoly power associated with the price and quantity

you found in part (a)?

DWL =

(d) Your friend in the marketing department says that they're thinking of running a big

advertising campaign to drum up demand for this cereal. If it is successful, then while it is being

run, for any price that you set the number of boxes of cereal purchased will increase that month

by 500 over what would happen without the campaign. What is the most you'd be willing to pay per month to run this campaign?

Highest marketing cost that is worthwhile = $?