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Hi John can you help?
The maximum demand for a company’s product M is 100 000 units per annum. The demand will be reduced by 40 units for every increase of $1 in the selling price. The company has determined that profit is maximised at a sales volume of 42 000 units per annum.
What is the profit maximising selling price for product M?
I’m not sure where to start!
You need to watch the free lecture on pricing.
There I explain how to derive the price/demand equation. Once you have the equation relating the price to the demand, you put in demand of 42,000 and then you will have the selling price.
(Our free lectures are a complete course for F5)
Ok I’ll watch that again, thanks. However I feel like I’m missing a piece of information in order to get price/demand function? I don’t have any selling price with which to find ‘a’ although I can get ‘b’ ok. I’m therefore unsure what to plug in.
‘a’ is the selling price at which the demand is zero.
Since demand when selling price is zero (i.e. maximum demand) is 100,000, and since demand falls by 40 for every increase of $ in the selling price, then to have zero demand (i.e. a fall of 100,000) then the SP needs to increase from zero to 100,000 x 1/40 = $2,500.
Therefore the price demand equation is:
P = 2500 – 1/40 Q
So when demand is 42,000, the selling price = 2500 – 42,000/40 = $1,450 per unit.
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