A Local Video Store Estimates Their Average Customer's Demand Per

question 55

Multiple Choice

A local video store estimates their average customer's demand per year is Q = 7 - 2P, and knows the marginal cost of each rental is $0.5.What is the annual profit that the video store expects to make on an average customer if it engages in optimal two-part pricing?

• A)$6.
• B)$7.
• C)$8.
• D)$9.

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Definitions:

Operating Leverage

A measure of how revenue growth translates into growth in operating income, highlighting the fixed versus variable costs structure of a business.

Variable Costs

Costs that change in proportion to the level of production or sales activity, such as raw materials and direct labor.

Operating Income

Income earned from a firm's regular business operations, excluding deductions of interest and taxes.

Absorption Costing

A costing method where all manufacturing costs, including both fixed and variable costs, are attributed to the product, thus fully absorbing them.