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Hey Sir,
Greetings !
Ques – Market research into demand for a product indicates that when the selling price per unit is $145, demand in
each period will be 5,000 units; 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 maximise the monthly profit?
My quest – For Demand function how did they get 165 priceThere is a change in demand of 11,250 – 5,000 = 6,250 units for a change in selling price of 145 – 120 = $25, therefore the rate of change is 25/6,250 (which is ‘b’ in the formula)
‘a’ in the formula is the selling price at which the demand will be zero.
At $145, the demand is 5,000. For demand to change by 5,000 the selling price will have to change by 5,000 x 25/6,250 = $20Therefore ‘a’ is 145 + 20 = $165.
This is all explaining in detail, with examples, in my free lectures on pricing. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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