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Demand Curve Mangerial Assignment

This document provides information and solutions to two problems related to demand curves and optimal pricing. For the first problem, it gives the demand curve equation for T-shirt sales and calculates values related to price and quantity based on the curve. For the second problem, it calculates the price elasticity of demand for Ford Focus sedans based on a price discount and sales increase. It then uses the elasticity value and cost information to calculate the profit-maximizing price.

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Agumas Alehegn
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657 views3 pages

Demand Curve Mangerial Assignment

This document provides information and solutions to two problems related to demand curves and optimal pricing. For the first problem, it gives the demand curve equation for T-shirt sales and calculates values related to price and quantity based on the curve. For the second problem, it calculates the price elasticity of demand for Ford Focus sedans based on a price discount and sales increase. It then uses the elasticity value and cost information to calculate the profit-maximizing price.

Uploaded by

Agumas Alehegn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment 2, (15%)

1. Demand Curves. ISHO-garment is contemplating a T-shirt advertising promotion.


Monthly sales data from T-shirt shops marketing indicate that 𝑄 = 1,500 – 200𝑃 where Q
is T-shirt sales and P is price.

a. How many T-shirts could ISHO-garment sell at $4.50 each?


b. What price would ISHO-garment have to charge to sell 900 T-shirts?
c. At what price would T-shirt sales equal zero?
d. How many T-shirts could be given away?
e. Calculate the point price elasticity of demand at a price of $5

Solution
a. Quantity of T-shirts at the price $4.50 is:

Q = 1,500 – 200*4.5 = 600 (T-shirts)

b. Price for selling 900 T-shirts is:

900 = 1,500 – 200P


200P = 600
P = $3

c. T-shirts sales equal zero at the price:

1,500 – 200P = 0
200P = 1,500
P = $7.5
d. How many T-shirts could be given away?
I assume could be given away is “for free” P=0
𝑄 = 1,500 – 200𝑃
Q= 1500-200*0
Q= 1500
e. Quantity at the price of $5:

Q = 1,500 – 200*5 = 500 (T-shirts)


Price elasticity of demand:
∆Q ∆Q
∗P 1 ∗P 1
Q2−Q1 Q 1 ∆P
∈ P= = =
Q1 ∆P Q1
P 2−P 1
P1
Therefor when P=$ 5 ,Q=1,500 – 200∗5=500 ( T −shirts )

∆Q
is the marginal change∈quantity following a 1unit change ∈price ,=−200
∆P

∈ 5 −10 ∈ p=¿−2 ¿
p=¿−200 × = ¿
500 5

2. 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.

Solution:
A. Point price elasticity of demand for Harrison Ford Focus SE sedans:

percentage change Quantity ( Q ) %∆Q


∈ P= ¿
percentage change∈unit price ( P ) %∆P
Change∈units sales of quantity =10 %
Change∈average price=−2.5 % becouse it indicates discount
10 % 10 4
= = =¿ - 4
−2.5 % −2.5 1

B. The profit maximizing price or optimal Price can be determined by equating marginal
costs with marginal revenue. MC=MR

1
MR=P 1+ ( ∈P )
1
therefore , MC=P 1+ ( ∈P )
MC
Profit maximizing p∗¿
1
(1+ )
∈P
MC
Profit maximizing P∗¿
1
(1+ )
∈P

MC=$ 875

$ 875+ $ 10,000 $ 875


∈ P=4 1 3 p∗¿ $ 14,500
(1+
−4 ) 4

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