Pricing and Production Decisions at PoolVac, Inc. PoolVac, Inc. manufactures and

Question

Pricing and Production Decisions at PoolVac, Inc. PoolVac, Inc. manufactures and sells a single product called the "Sting Ray," which is a patent-protected automatic cleaning device for swimming pools. PoolVac's Sting Ray accounts for 65 percent of total industry sales of automatic pool cleaners. Its closest competitor, Howard Industries, sells a competing pool cleaner that has captured about 18 percent of the market. Six other very small firms share the rest of the industry's sales. Using the last 26 months of production and cost data, PoolVac wishes to estimate its unit variable costs using the following quadratic specification: The monthly data on average variable cost (AVC), and the quantity of Sting Rays produced and sold each month (O) are presented in the table below. PoolVac also wishes to use its sales data for the last 26 months to estimate demand for its Sting Ray. Demand for Sting Rays is specified to be a linear function of its price (P), average income for households in the U.S. that have swimming pools (Mag), and the price of the competing pool cleaner sold by Howard Industries (P) The table below presents the last 26 months of data on the price charged for a Sting Ray (P), average income of households with pools (MAVG), and the price Howard Industries charged for its pool cleaner (PH) obs AVC P MAVG PH 1 109 1647 275 58000 175 2 118 1664 275 58000 175 3 121 1295 300 58000 200 4 102 1331 300 56300 200 5 121 1413 300 56300 200 6 102 1378 300 56300 200 7 105 1371 300 57850 200 8 101 1312 300 57850 200 9 108 1301 325 57850 250 10 113 854 350 57600 250 11 114 963 350 57600 250

Explanation / Answer

1) a) AVC = 152.88 -0.06Q + 0*Q2 The coefficient of both the Q and Q2 are statistically significant at 5% level of significanceas the p-values associted with Q and Q2 are less than 5%. The signs are in line with expectation.The coefficient of Q is negative that is it decreases buand Q2 is positive but magnitude is not big enough. b) TVC = 152.88*Q-0.06*Q2+0*Q3 AVC = 152.88-0.06*Q+0*Q2 MC = 152.88-0.12*Q c) Min AVC = 152.88-0.06 = 152.82

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