Optimal Pricing for an Aggregate Demand Curve The table below shows the hypothet
ID: 1213999 • Letter: O
Question
Optimal Pricing for an Aggregate Demand Curve The table below shows the hypothetical prices and quantities demanded of a software product. Assume that the fixed cost of setting up the production of software is $200 and the marginal cost is $5. a) Fill out the table by calculating the revenue, the marginal revenue, the marginal cost, and the profit. b) Give a general definition of price elasticity of demand. Explain the factors that make the demand of the product more elastic. c) Calculate the own price elasticity of increasing the price from $0 to $5, from $5 to $10, etc., from $35 to $40. In which price region is the demand for the product elastic and in which region is it inelastic? d) Conduct a stay even analysis by calculating the critical loss from increasing the price from $30 to $35. How much business can the software company afford to lose by increasing the price in order to maintain its profit? Solution: Price ($) Quantity sold Revenue MR MC Profit Elasticity 40 0 35 10 30 20 25 30 20 40 15 50 10 60 5 70 0 80Explanation / Answer
Answer:
1) Fill out the table by calculating the revenue, the marginal revenue, the marginal cost, and the profit.
Total Cost (or) Cost = TFC + TVC = $200 + 0 = $200
Total Revenue (or) Revenue = P*Q
MC = TC/Q
MR = TR/Q
Profit = TR - TC
Price ($)
Quantity sold
Revenue
MR
MC
Profit
40
0
-
-
-
-
35
10
350
35
20
150
30
20
600
60
10
400
25
30
750
75
6.66
550
20
40
800
80
5
600
15
50
750
75
4
550
10
60
600
60
3.33
400
5
70
350
35
2.85
150
0
80
0
0
2.5
0
Therefore, the profit maximization of the software product at price $20 and 40 units of quantity sold.
2. Give a general definition of price elasticity of demand. Explain the factors that make the demand of the product more elastic.
The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change its price. The PED for a good is relatively inelastic (-1 < Ed < 0). The price elasticity of demand for a particular brand is more elastic than that for a product in general because people can switch to an alternative brand if the price of one brand goes up. No such switching will take place if the price of the product in general (i.e. all brands) goes up. Thus the difference in elasticity is the result of a difference in the size of the substitution effect.
Price ($)
Quantity sold
Revenue
MR
MC
Profit
40
0
-
-
-
-
35
10
350
35
20
150
30
20
600
60
10
400
25
30
750
75
6.66
550
20
40
800
80
5
600
15
50
750
75
4
550
10
60
600
60
3.33
400
5
70
350
35
2.85
150
0
80
0
0
2.5
0
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.