Robinson Plastics makes clear plastic products with injection molding techniques
ID: 1236350 • Letter: R
Question
Robinson Plastics makes clear plastic products with injection molding techniques. Their latest invention is a plastic cup with a sharp blade mounted inside to cut prescription pills into small pieces. The cup is placed over the pill and as the cup is pressed down, the pill is split into pieces which are contained inside the cup. Because the cup is above the pill, persons can see how the pill is cut and keep the pieces contained. The presumed market is drugstores who would then sell to customers who want to reduce dosage size.A survey of local drug manufacturers and retailers suggest that market demand over the next year can be characterized by:
Q = 2,000,000 - 100,000*P + 5*A
Where Q=unit sales, P=price in dollars, and A=advertising expenditure in trade journals and publications.
Robinson is considering a price of either $1 or $2 and an advertising budget of $10,000. Robinson has estimated production cost at $0.75 per unit.
a. Compute the quantity sold and the own price elasticity's at the $1 and $2 sales prices, assuming the stated advertising budget.
b. What is the advertising elasticity at the sales price of $2 assuming the stated advertising budget.
c. How useful is this demand equation for forecasting demand for the pill slicer in the next five years? Explain.
Explanation / Answer
Robinson Plastics makes clear plastic products with injection molding techniques. Their latest invention is a plastic cup with a sharp blade mounted inside to cut prescription pills into small pieces. The cup is placed over the pill and as the cup is pressed down, the pill is split into pieces which are contained inside the cup. Because the cup is above the pill, persons can see how the pill is cut and keep the pieces contained. The presumed market is drugstores who would then sell to customers who want to reduce dosage size.
A survey of local drug manufacturers and retailers suggest that market demand over the next year can be characterized by:
Q = 2,000,000 - 100,000*P + 5*A
Where Q=unit sales, P=price in dollars, and A=advertising expenditure in trade journals and publications.
Robinson is considering a price of either $1 or $2 and an advertising budget of $10,000. Robinson has estimated production cost at $0.75 per unit.
a. Compute the quantity sold and the own price elasticity's at the $1 and $2 sales prices, assuming the stated advertising budget.
Q = 2,000,000 - 100,000*P + 5*A
For A = 0.75 as given, this means:
Q = 2,000,000 - 100,000*P + 3.75
Hence for P = 1, Q = 2,000,000 - 100,000 + 3.75 = 1,900,003.75
Price elasticity = -1
For P = 2, Q = 2,000,000 - 200,000 + 3.75 = 1,700,003.75
Price elasticity = -2
b. What is the advertising elasticity at the sales price of $2 assuming the stated advertising budget.
We calculate this with the derivative of Q with respect to A
Hence the advertising elasticity = 5.
c. How useful is this demand equation for forecasting demand for the pill slicer in the next five years? Explain.
It's not completely useless, but it's not very useful, either. This is because drug advertising has a high cost to "enter into the market" - a high fixed cost for advertising, and hence a high barrier to entry - but once the units have been established in the drug and medical community, advertising will not be as necessary.
For instance, everyone knows what Lunesta is; once its initial advertising "push" has been completed, the need for additional advertising decreases substantially.
I hope that you found this answer useful towards your studies. It took a considerable amount of thought, time, and effort to compose, and and I'd sincerely appreciate a lifesaver rating! It would really make my day! :)
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