Annual rental property income offsets fixed costs that Best Homes Inc. incurs and should remain as a steady income stream. The optimal quantity of new home construction is 15 homes at Marginal Cost = Marginal Revenue (MC = MR) in 2017, as the cost will be higher than the benefit from the building of the 15th home to the 16th home. While it should not discontinue operations with the 16th home, Best Homes must analyze supply and demand factors of prevailing economic and market conditions. If demand increases and variable costs decrease, building the 16th home may benefit the company and increase revenue. The additional number of homes built should increase until MR is equal to MC (Samuelson & Marks, 2015).
Prices in the supply and demand inverse relationship are determined by buyers and sellers in a market economy (Samuelson & Marks, 2015). When prices rise, quantity rises and demand falls, creating a surplus of goods that must be discounted to clear out goods (Samuelson & Marks, 2015). In other words, higher prices of goods result in lower demand. When supply is low or prices are too low and demand is high, a shortage occurs and prices on the few remaining goods may rise to satisfy the high demand (Samuelson & Marks, 2015). Market equilibrium is reached when the quantity supplied equals the supply demanded (Samuelson & Marks, 2015). Thus, 20 homes demanded will be built to fulfill the market request.
Impact. The price elasticity of demand for newly constructed homes determines the MR of Best Homes (Samuelson & Marks, 2015). Since other construction companies build new homes and prices are relatively constant with similar interior options, demand will be elastic (Samuelson & Marks, 2015). If Best Homes is the only manufacturer of micro luxury homes, it may increase prices; yet, demand will be inelastic due to the company’s unique offering and the current trend for this type of mobile housing. Best Homes will achieve market equilibrium when its supply of micro luxury homes is the exact number of homes demanded in the market. Market forces dictate a decrease and increase in prices as the supply of homes declines or grows.
127 our experts are availableright now
Increased demand for micro luxury homes will influence marginal costs of building additional homes. Best Homes’ current price of $18,000 per home has a profit of $10,000 after fixed and variable costs of $8,000 are factored on the 15th home. If costs remain constant and demand increases, Best Homes can sell the 16th home for $22,000. Marginal revenue increases when the profit on the 16th home is greater than the profit on the 15th home if fixed and variable costs do not rise. Thus, the cost of building 15 homes is $120,000 and 16 homes $128,000. Therefore, ($128,000 – $120,000) / (16-15) = $8,000 marginal cost for building the 16th home. Revenue can be expressed in numerical terms as $150,000 + $14,000 = $164,000 total revenue on 16 homes. Therefore, ($164,000 – $150,000) / (16 – 15) = $14,000 marginal revenue from building the 16th home.
The current trend of owning micro homes to eliminate mortgages has been steadily growing. Best Homes can increase micro home prices until demand becomes elastic. Conversely, if Best Homes raises its prices but additional micro luxury homebuilders enter the market, demand may become inelastic. There are numerous supply and demand determinants that will influence the equilibrium price to rise and fall. The optimum number of homes built will occur when an additional home is equal to cost with no additional benefit of building one more home (Samuelson & Marks, 2015). Decisions by Best Homes’ owner or managers will guide profit maximization through empirical testing based on several assumptions about the current market trends.
