What is the profit-maximizing price for a new product?
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A manufacturer of electronic products has just developed a handheld computer. Following is the cost schedule for producing these computers on a monthly babsis. Also included is a schedule of prices and quantities that the firm believes it will be able to sell (baseed on previous market research).
Q Price MR AVC AC MC
0 $1,650
1 $1,570 $1,570 $1,281 $2,281 $1,281
2 $1,490 $1,410 $1,134 $1,634 $987
3 $1,410 $1,090 $1,009 $1,342.33 $759
4 $1,330 $1,090 $906 $1,156 $597
5 $1,250 $930 $825 $1,025 $501
6 $1,170 $770 $766 $932.67 $471
7 $1,090 $610 $729 $871.86 $507
8 $1,010 $450 $714 $839 $609
9 $930 $290 $721 $832.11 $777
10 $850 $130 $750 $850 $1,011
a. What price should the firm charge if it wants to maximize its profits in the short run?
b. What arguments can be made for charging a price higher than the profit-maximizing price? What exactly price would you recommend? Explain.
c. What arguments can be made for charging a lower than the profit-maximizing price? What price from the available prices do you recommend? Explain.
Solution Guide
1. Use the marginal rule (MR=MC) to determine the profit-maximizing price.
2. Total revenue is maximized when MR=0.
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Solution Summary
This solution looks at profit maximization price in 450 words. Total Revenue, Total Cost and Profit are calculated in an attached Excel file.
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A manufacturer of electronic products has just developed a handheld computer.
Following is the cost schedule for producing these computers on a monthly basis. Also included is
a schedule of prices and quantities that the firm believes it will be able to sell (based on previous market research).
Q Price MR AVC AC MC Total Revenue Total Cost Profit
0 $1,650
1 $1,570 $1,570 $1,281 $2,281 $1,281 $1,570 $2,281 ($711)
2 $1,490 $1,410 $1,134 $1,634 $987 $2,980 $3,268 ($288)
3 $1,410 $1,090 $1,009 $1,342.33 $759 $4,230 $4,027 $203
4 $1,330 $1,090 $906 $1,156 $597 $5,320 $4,624 $696
5 $1,250 $930 $825 $1,025 $501 $6,250 $5,125 $1,125
6 $1,170 $770 $766 $932.67 $471 $7,020 $5,596 $1,424
7 $1,090 $610 $729 $871.86 $507 $7,630 $6,103 $1,527
8 $1,010 $450 $714 $839 $609 $8,080 $6,712 $1,368
9 $930 $290 ...
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