Using the Following Information:
Drill Quest, Inc $Q = 1,200 - 0.05 P$

question 16

Multiple Choice

Using the following information:
Drill Quest, Inc. manufactures drill bits for the oil industry. Drill Quest uses cost-plus pricing to set the price of its bits. Currently Drill Quest applies a 50 percent markup on average total cost. Average variable cost of producing bits is constant and equal to $6,000 per bit. Total fixed cost at Drill Quest is $550,000. DrillQuest currently produces 690 bits. Statistical estimation of demand for Drill Quest brand bits produces the following linear demand equation (where Q is the number of bits demanded and P is the price of bits) :
$Q = 1,200 - 0.05 P$
-If Drill Quest wishes to use cost-plus pricing, it can maximize profit by applying a markup of _____ percent on __________.

• A) 150 percent; AVC
• B) 150 percent; ATC
• C) 50 percent; AVC
• D) 50 percent; ATC
• E) 250 percent; AVC

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Definitions:

Inelastic Good

A product or service whose demand does not significantly change with a change in its price, indicating consumers' necessity or lack of substitutes.

Gasoline Expenditures

The total amount of money spent by consumers on gasoline, encompassing both retail purchases for vehicles and other uses.

Public Transportation

A system of vehicles such as buses, trains, and subways, provided by the government or private companies, for the purpose of transporting large numbers of people.

Cross-price Elasticity

Measures the responsiveness of the demand for one good to a change in the price of another good.