You are the owner of a local Honda dealership. Unlike other dealerships in the a

Question

You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your “No Haggle” sales policy. Last year, your dealership earned record profits of $1.3 million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is -1.7. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealership in the nation. This entitled your dealership to an additional 30 percent off the manufacturer’s suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is $13,000.

What price should you charge for a midsized automobile if you expect to maintain your record sales?
Instruction: Round your answer to two decimal places.
$_______________

Explanation / Answer

The markt seems like an oligopoly, where the firm is being leader in sales of midzied automobiles in the area. From its price elasticity it is confirmed that consumers choice does not change significantly over the change in price.

Lets calculate the profit maximizing price as follows:

P = (N*EM/ 1 + N*EM)MC = (3(-1.7) / 1 + 3(-1.7))$13,000 = $16,170.73.

Thus the coompany should charge $16,170.73.

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