The manager of a sole distributorship for a famous brand of automobiles was discussing with the assistant manager the planned introduction by mid-year of a new model, the XP-60. It was decided earlier that the price be set at P400,000, at which level the total number of units sold was estimated at 500 units annually. The assistant manager has suggested that the price should be set at a somewhat lower level, say, at P360,000 in order to attract a major segment of the non-targeted market. At this lower price, 1,000 units are expected to be sold. 1. Formulate the firm’s linear demand equation for the product given the estimates and projections made. 2. What is the (point) price elasticity of demand at price P400,000? At P360,000? 3. What is the midpoint arc price elasticity of demand between these two prices? Interpret the result. 4. Determine the total revenue (TR) function and the marginal revenue (MR) function. 5. Calculate marginal revenue at the originally proposed price and at the recommended lower price. What do these values mean to the firm? 6. Will total revenue increase as a result of the decision to reduce the price? If so, by how much? 7. Should the firm raise the price? Justify your answer. 8. What price and quantity combination will the firm realize the maximum TR? Note: Show supporting calculations.
The manager of a sole distributorship for a famous brand of automobiles was discussing
with the assistant manager the planned introduction by mid-year of a new model, the
XP-60. It was decided earlier that the price be set at P400,000, at which level the total
number of units sold was estimated at 500 units annually. The assistant manager has
suggested that the price should be set at a somewhat lower level, say, at P360,000 in
order to attract a major segment of the non-targeted market. At this lower price, 1,000
units are expected to be sold.
1. Formulate the firm’s linear demand equation for the product given the estimates and
projections made.
2. What is the (point) price
3. What is the midpoint arc price elasticity of demand between these two prices?
Interpret the result.
4. Determine the total revenue (TR) function and the marginal revenue (MR) function.
5. Calculate marginal revenue at the originally proposed price and at the
recommended lower price. What do these values mean to the firm?
6. Will total revenue increase as a result of the decision to reduce the price? If so, by
how much?
7. Should the firm raise the price? Justify your answer.
8. What price and quantity combination will the firm realize the maximum TR?
Note: Show supporting calculations.
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