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Pricing Strategies and Profit Maximizing Behavior

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1. Ageless Corp. has a patent for a new promising age-defying moisturizer cream. The annual demand, marginal revenue, and marginal cost functions for this cream is estimated as:

P = 150,000 - 250 (Q)

MR = 150,000 - 500Q)

MC = 100

A) If Ageless Corp. behaves as a profit maximizing monopoly, determine the price and quantity that prevails in this market.

B) Determine the socially efficient price and quantity in this market.

2. Pet Peeve Inc. manufactures and sells a highly realistic computerized pet toy in the US market. Marginal costs for manufacturing and distribution of the toy is currently $100 per unit. Based on recent sales experience, the estimated total cost, demand, and marginal revenue functions for this pet toy are:

TC = 1,200,000 + 100 (Q)

P = 300 0.0016(Q)

MR = 300 0.0032(Q)

Assuming a profit maximizing behavior for this firm, calculate:

A) Output.

B) Price.

C) Total revenue.

D) Fixed Cost.

E) Total variable cost.

F) Total cost.

3. Healthy Inc. is operating a small grocery store in a remote area with no competition. Recently, however, several prospective competitors are looking around and are contemplating entry into this market.

A) What pricing strategy she might utilize to deter the competitors from entering his market?

B) Assume that eventually large number of competitors enter this market. What do you think would be the differences in the grocery market before and after of the entry by the new firms?

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1. Ageless Corp. has a patent for a new promising age-defying moisturizer cream. The annual demand, marginal revenue, and marginal cost functions for this cream is estimated as:
P = 150,000 - 250 (Q)
MR = 150,000 - 500Q
MC = 100

A) If Ageless Corp. behaves as a profit maximizing monopoly, determine the price and quantity that prevails in this market.

For profit Maximization, set MC=MR
150,000-500Q=100
Q=(150000-100)/500= 299.8
P=150000-250*Q=150000-250*299.8=75050

B) Determine the socially efficient price and quantity in this market.
For socially efficient price P=MC
150000-250Q=100
Q=(150000-100)/250=599.6
P=150000-250*599.6=100

2. Pet Peeve Inc. manufactures and sells a highly realistic computerized pet toy in the US market. Marginal costs for manufacturing and distribution of the toy is currently $100 per unit. Based on recent sales experience, the estimated total cost, demand, and marginal revenue functions for this pet toy are:

TC = 1,200,000 + 100 (Q)
P = 300 0.0016(Q)
MR = 300 0.0032(Q)

Assuming a profit maximizing behavior for this firm, calculate:

A) Output.
For profit maximization MR=MC
MC= $100
MR=300-0.0032Q
So we have
300-0.0032Q = 100
Q = (300-100)/0.0032=62500

B) Price.
P=300-0.0016Q=300-0.0016*62500=$200

C) Total revenue.
TR=P*Q=200*62500=$12,500,000

D) Fixed Cost.
Fixed cost is the cost which does not change with output. The constant term in the total cost equation.
Fixed cost = $1,200,000

E) Total variable cost.
TVC = 100*Q=100*62500=$6,250,000

F) Total cost.
TC =1,200,000+100*62500=$7,450,000

3. Healthy Inc. is operating a small grocery store in a ...

Solution Summary

The pricing strategies and profit maximizing behaviors is determined.

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