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This Study Resource Was: Answer

Harrison Ford offered a 2.5% discount on Focus sedans in August, increasing sales by 10% over the previous month. This resulted in a price elasticity of demand of -4. To maximize profits given a wholesale cost of $10,000 per unit and $875 in marginal costs, the optimal price should be $13,333.33 per unit.

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988 views2 pages

This Study Resource Was: Answer

Harrison Ford offered a 2.5% discount on Focus sedans in August, increasing sales by 10% over the previous month. This resulted in a price elasticity of demand of -4. To maximize profits given a wholesale cost of $10,000 per unit and $875 in marginal costs, the optimal price should be $13,333.33 per unit.

Uploaded by

teme beya
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Optimal Pricing.

In an effort to reduce excess end-of-the-model-year


inventory, Harrison Ford offered a 2.5% discount off the average list price
of Focus SE sedans sold during the month of August. Customer response
was enthusiastic, with unit sales rising by 10% over the previous month’s
level.
A. Calculate the point price elasticity of demand for Harrison Ford Focus
SE sedans.
B. Calculate the profit-maximizing price per unit if Harrison Ford has an
average wholesale cost of $10,000 and incurs marginal selling costs of $875
per unit.

Answer:

Part-A

m
er as
Calculate the point price elasticity of demand for Harrison Ford Focus SE

co
sedans.

eH w
o.
precentage change ∈quantity
rs e
price elasticity(ε p)=
precentage change∈ price
ou urc
o

Given that:
aC s
v i y re

Percentage change in quantity: 10%= 0.10

Percentage change in price: 2.5% off= -0.025


ed d

0.10
price elasticity(ε p)=
ar stu

−0.025

price elasticity ( εp )=−4 (elastic)


sh is
Th

Part-B

B. Calculate the profit-maximizing price per unit if Harrison Ford has an


average wholesale cost of $10,000 and incurs marginal selling costs of $875 per
unit.
Soln:
The profit-maximizing price can be found using the optimal price formula:
MC
P=
1
1+
εp

This study source was downloaded by 100000826498391 from CourseHero.com on 08-03-2021 15:16:13 GMT -05:00

https://www.coursehero.com/file/61838298/Optimal-Pricingdocx/
Given that:

M(average wholesale cost)=$10,000

C(selling cost per unit)=$875

So,
MC
P=
1
1+
εp

10,000+875
P=
1
1+
−4

m
er as
10,875∗(−4)

co
P=

eH w
−3

o.
P=13333 . 33
rs e
ou urc
o
aC s
v i y re
ed d
ar stu
sh is
Th

This study source was downloaded by 100000826498391 from CourseHero.com on 08-03-2021 15:16:13 GMT -05:00

https://www.coursehero.com/file/61838298/Optimal-Pricingdocx/
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