The Bumpy Ride Suspension company makes springs for bicycle seats. Currently thes prings sell for $5 each. Being profit maximizers, the company makes just enough springs so that the marginal cost of the last spring produced is $5. Their average total cost at that output is $3.50. If they currently produce 1,000 springs and the market price falls by $1, approximately how much profit will be lost?
A) all of the profit will be lost
B) profit will fall by $1 per spring
C) there will be no loss of profit
D) more than $1,000 but less than $1,500
E) less than $1,000

Question

Quizplus · Accepted Answer

The profit per spring before the price drop is $1.50 ($5 - $3.50). After a $1 decrease in price, the new selling price is $4, making the new profit per spring $0.50 ($4 - $3.50). The loss in profit per spring is $1 ($1.50 - $0.50), and for 1,000 springs, the total profit loss is $1,000. However, the question asks for the approximate amount, and since the company might adjust production to the new market conditions, the exact profit loss could be slightly less than $1,000, hence "less than $1,000."

The Bumpy Ride Suspension Company Makes Springs for Bicycle Seats