Managerial Economtrics Bout Cost Function

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4. Jordan Business Corporation manulactures calculators, involving a product line ol two
models. The current price charged for its B1 model is Br8, and profit contribution is 25
per cent. Sales have been disappointing tor this hmodel, so Jordan Business is considering a
quality improvement at a cost of S0 per calculator. Advertising would be increased by Br
40,000 to promote the improvement. Current prolit is Br 60,000 on sales of 80,000 items
per month. There is a relationship between sales of BI and B2 models, such that for every
four extra sales of a Bl model there is one less sale of a B2 model, as some consumers
switch from one model to the other, The B2 models sell for Br 6 and have an average
variable cost of Br 5,
a. Determine the cost function for the Bl model with the changes that Jordan Business 5
considering.
b. Caleulate the increase in sales of Bl models necessary with the quality improvement
in order to carn increased profits of Br 40,000, ignoring the elfect on sales ol B2
odels.
C. Calculate the increase in sales of BI models necessary with the quality improvement in
order to carn increased prolits of Br 40,000, taking into account the ellect on sales ot
B2 models.