Chapter 7: Pricing

Part (a). A company sells an article at $12 per unit and has a demand of 16,000 units at this price. If the selling price were to be increased by $1 per unit, it is estimated that demand will fall by 2,500 units. On the assumption that the price/demand relationship is linear, derive the equation relating the selling price to the demand.

Part (b). At a selling price of $100 per unit the company will sell 20,000 units a year. For every $2 change in the selling price, the demand will change by 2,000 units. The costs comprise a fixed cost of $100,000, together with a variable cost of $5 per unit. Calculate the selling price per unit that will result in maximum profit a year, and the amount of that profit.

Formulae (from the formula sheet): demand curve P = a - bQ; marginal revenue MR = a - 2bQ.