Swedish Automobiles Are the Best (SAAB) sells two types of cars: a combi and a sedan. Based on past trends, the inverse demand equation for cars is estimated as PC = 40 - 0.05QC where QC is the number of combi cars sold per year and PC is the price per combi car (in thousands of dollars). The price equation for sedans is: PS = 30 - 0.1QS. In turn, SAAB pays $10 (thousand) to produce each combi car and $8 (thousand) to produce each sedan.

a.) Determine the profit-maximizing outputs of combi cars and sedans for SAAB and the respective price they should charge for combi cars and sedans.

b.) Compute the total profit earned from combi cars and sedans combined using the quantities computed in part a:

c.) Suppose now that SAAB’s capacity is limited to a total of 260 vehicles per year. Determine the profit-maximizing quantities of and prices for combi cars and sedans for SAAB with this new constraint.

d.) Compute the total profit earned from combi cars and sedans combined using the quantities computed in part c:

e.) SAAB is considering an expansion of their production facility, which would increase their current capacity (of 260) by as much as 80%. This expansion would also increase their annual fixed cost by $700 (thousand). Should SAAB expand (motivate your answer using profit data)?

Answer rating: 100% (QA)

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