Knitting Mills sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a  year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal  $120,000. The production department has estimated that a 10 percent increase in output  would not affect fixed costs but would reduce average variable cost by 40 cents. The  marketing department advocates a price reduction of 5 percent to increase sales, total  revenues, and profits. The arc elasticity of demand is estimated at -2.  i. Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost,  and (3) total profits.  ii. If average variable costs are assumed to remain constant over a 10 percent increase  in output, evaluate the effects

ENGR.ECONOMIC ANALYSIS
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Knitting Mills sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a 
year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal 
$120,000. The production department has estimated that a 10 percent increase in output 
would not affect fixed costs but would reduce average variable cost by 40 cents. The 
marketing department advocates a price reduction of 5 percent to increase sales, total 
revenues, and profits. The arc elasticity of demand is estimated at -2. 
i. Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost, 
and (3) total profits. 
ii. If average variable costs are assumed to remain constant over a 10 percent increase 
in output, evaluate the effects of the proposed price cut on total profits. 

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