Suppose as a manager of a profitable department store you are confronted with a

Question

Suppose as a manager of a profitable department store you are confronted with a pricing problem. You have two types of customers : a high-end type that are willing to pay a price of $20 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $13 for the same pair of jeans. Your supplier provided you with the jeans at MC of $ 11 per jeans. Your survey of your customers for jeans tells you that 50%  of your customers are of the high end type and 50% are of the low end type.

(A) if you decided to price high, what would be your expected profits per unit.

(B) if you decided to price low, what would be your expected profits per unit.

(C) suppose your store attracts 1000 customers for these jeans: will you price high or low? Explain briefly.

Explanation / Answer

Expected profit per unit:

High end = (0.5) (20-11) + 0.5 (0) [Since, 50% of the customers would be lost)

= 4.5 $ per piece would be the expected profit per piece

Low end = We have 100% consumers:

Thus, profit per piece = 1 (13-11) = 2 $ per piece.

Note that the high end customers will Also buy at the low end price.

For about 1000 customers, we shall use a high end price as theexpected profit per jeans is more in that case which compensates the loss of customers due to high end prices.

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