Purchase Solution

Question about Pricing strategies

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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
0 \$1,650
1 \$1,570 \$1,570 \$1,281 \$2,281
2 \$1,490 \$1,410 \$1,134 \$1,634
3 \$1,410 \$1,090 \$1,009 \$1,342.33
4 \$1,330 \$1,090 \$906 \$1,156
5 \$1,250 \$930 \$825 \$1,025
6 \$1,170 \$770 \$766 \$932.67
7 \$1,090 \$610 \$729 \$871.86
8 \$1,010 \$450 \$714 \$839
9 \$930 \$290 \$721 \$832.11
10 \$850 \$130 \$750 \$850

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 Summary

Solution describes the steps for calculating profit maximizing price and output. It also discusses the reasons for charging lower or higher prices than optimal price.

Solution Preview

Please refer attached file for better clarity of tables.

Solution:

a.What price should the firm charge if it wants to maximize its profits in the short run?

Q Price MR AVC AC MC Total Revenue (P*Q) Total Cost (AC*Q) Profit (TR-TC)
0 \$1,650
1 \$1,570 \$1,570 \$1,281 \$2,281 \$1,570 \$2281 (\$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 ...

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• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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