You are the owner of a local Saturn dealership that competes against two other firms (Ford and Chrysler dealerships) Unlike other dealerships in the area, you take pride in your â??No Hassles, No Haggleâ? sales policy. Last year, your dealership earned record profits of $1.5 million. However, according to the local Chamber of Commerce, your earnings were 10 percent less than either of your competitors. In your market, the price elasticity of demand for midsized Saturn automobiles is -4.5 In each of the last five years, your dealership has sold more midsized automobiles than any other Saturn dealership in the nation. This entitled your dealership to an additional 30 percent rebate off the manufacturer´s suggested retail price (MSRP) in each year. Taking this rebate into account, your marginal cost of a midsized automobile is $11,000. What price should you charge for a midsized automobile if you expect to maintain your record sales?
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Your profit last year = $1.5 million
Your competitor profit last year = $1.5 million x (100% + 10%) = $1.65 million
Price elasticity of demand for midsized Saturn = -4.5
Total rebate per car = ...
What price should you charge for a midsized automobile if you expect to maintain your record sales?