Northgate Packaging produces standard cardboard boxes. The business currently turns away some orders during periods of high demand. It is considering an automated cutting line and additional storage space so that it can respond more quickly to changes in the market price.
The current market price is £1.00 per box. Managers are uncertain whether this price will remain unchanged or rise by 10%. Table 1 shows their estimates. Annual total costs exclude the initial investment cost.
| Measure | Without investment | With investment |
|---|---|---|
| Price elasticity of supply | 0.25 | 1.20 |
| Forecast quantity sold if price is unchanged | 1.60 million boxes | 1.85 million boxes |
| Maximum annual capacity | 1.70 million boxes | 2.30 million boxes |
| Forecast annual revenue if price is unchanged | £1.60 million | £1.85 million |
| Forecast annual revenue if price rises by 10% | £1.80 million | £2.28 million |
| Annual total costs if price is unchanged | £1.25 million | £1.52 million |
| Annual total costs if price rises by 10% | £1.28 million | £1.58 million |
| Initial investment cost | £0 | £700,000 |
The equipment is expected to operate for five years.
Assess whether the proposed investment is likely to improve Northgate Packaging's profit over the five-year life of the equipment. Use Table 1 in your answer.
236 exam-style questions on AQA GCSE Economics 1.3 How prices are determined, covering 1.3.1a Demand and the factors that influence it, 1.3.1b The demand curve, 1.3.2a Supply and the factors that influence it, 1.3.2b The supply curve, 1.3.3a Determining equilibrium price, 1.3.3b Applying diagrams and showing revenue, 1.3.4a Complements and substitutes, 1.3.4b Effects of changes on related markets, 1.3.5a Price elasticity of demand, 1.3.5b Factors affecting price elasticity of demand, 1.3.5c Measuring PED and its implications, 1.3.6a Price elasticity of supply, 1.3.6b Factors affecting price elasticity of supply, and 1.3.6c Measuring PES and its implications. Each one has a worked solution and a mark scheme showing where the marks go.