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Question about Pricing strategies

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.

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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 ...

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.

$2.19