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I am trying to find out an easier way to answer this sort of questions than the one presented by BPP in their book, but I find it hard to understand. It would be great if you could help… and many thanks
A company is selling a product at 120/unit.
At this price is selling 200.000 units/period.
It has been estimated that for every $5 increase or reduction in price, sales demand will fall or increase by 10.000 units.At what selling price will total sales revenue per period be maximised
Have you watched the free lecture on pricing? Because I go through several examples in the lecture.
From the formula sheet, b = 5/10,000 = 0.0005
To get ‘a’, you take the current selling price (120) and add ‘b’ times the current demand (200,000)
So a = 120 + 0.0005×200,000 = 220
So P = 220 – 0.0005Q
From the formula sheet therefore, the marginal revenue (MR) = 220 – 0.001Q
For maximum revenue you make MR = 0
For maximum profit you make MR = marginal (variable) cost.So here, for maximum revenue, 220 – 0.001Q;
so 220 = 0.001Q
So Q = 220/0.001 = 220,000Put that value for Q in the price demand equation, and you have the answer.
(There isn’t really any other way of doing it 🙂 )
It really makes more sense, it helped a lot, it is very confusing (for me) the answer presented in the book. Chances are it wont be on my paper exam on Monday :-), but it’s not on my mind any more. Thanks a lot for your time, it is much appreciated, your answer and everything you are doing here for us. Thank you.
Hi John, remember how I told you that chances are it want be on the exam paper? It was on the exam paper as part of a 10 point problem, without it I could not go on with the rest of the problem. Just meant to say a milion thanks it could be the diference between ” to be or not to be” :-). I can not thank you enough. All the best.
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