2.8 In 1916, Ford Motor Company produced 500,000 Model T Fords, at a price of $440 each. The company made a profit of $60 million that year. Henry Ford told a newspaper reporter that he intended to reduce the price of the Model T to $360, and he expected to sell 800,000 cars at that price. Ford said, “Less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make.”

a. Did Ford expect the total revenue he received from selling Model Ts to rise or fall following the price cut?

b. Use the information given above to calculate the price elasticity of demand for Model Ts. Use the midpoint formula to make your calculation. (See Chapter 6, page 174, if you need a refresher on the midpoint formula.)

c. What would the average total cost of producing 800,000 Model Ts have to be for Ford to make as much profit selling 800,000 Model Ts as it made selling 500,000 Model Ts? Is this smaller or larger than the average total cost of producing 500,000 Model Ts?

d. Assume that Ford would make the same total profit when selling 800,000 cars as when selling 500,000 cars.

Was Henry Ford correct in saying he would make less profit per car when selling 800,000 cars than when selling 500,000 cars?