GA

5. MNP Company has seen its sales volume decline over the last few years. In order to increase sales and profits, the firm is considering a price reduction on its production. The firm currently sells 40,000 units of its production a year at an average price of $5 per unit. Fixed costs are $125,000. Current variable costs per unit are $2.5. The firm has determined that the variable cost per unit could be reduced by $0.25 if production volume could be increased by 5 percent (fixed costs would remain constant). The firm's arc price elasticity of MNP products is -1.5.

(a)How much would MNP have to reduce the price in order to achieve a 5 percent increase in the quantity sold?

(b)What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?