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Market Research into demand for a product indicates that when the selling price per unit is $145, demand in each period will be 5000 units and if the price is $120, demand will be 11,250 units. It is assumed that the demand function for this product is linear. The variable cost per unit is $27.
What selling price should be charged in order to maximize the monthly profit?
Answer is $96.
Sir, could you please write the workings for the answer as I used the formula p=a-bQ and got a different answer. and bpp kit explanation is so confusing.
Thanks
Using the formula for ‘b’ on the formula sheet, b = (145 – 120) / (11250 – 5000) = 25/6250 = 0.004
‘a’ is the price at which the demand will be zero and so a = 145 + (0.004 x 5,000) = 165
So P = 165 – 0.004Q
Therefore MR = 165 – 0.008Q
For maximum profit, MR = MC,
So 165 – 0.008Q = 270.008Q = 138
So Q = 138/0.008 = 17,250There P = 165 – (0.004 x 17,250) = 96
Have you watched my free lectures on pricing?
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