A television station is considering the sale of promotional DVDs. It can have the DVDs produced by one of two suppliers. Supplier A will charge the station a set-up fee of $1,200 plus $2 for each DVD. Supplier B has no set-up fee and will charge $4 per DVD. The station estimates its demand for the DVDs to be given by Q-1,600-200P, where P is the price in dollars and Q is the number of DVDs. (The price equation is P=8-Q/200.)
a. Suppose the station plans to give the DVDs away. How many should it order? From which supplier?
b. Suppose the station instead seeks to maximize profits from sales of the DVDs. What price should it charge? How many DVDs should it order from which supplier? Solve two separate problems and compare profits. Apply the Marginal Revenue (MR)=Marginal Cost (MC) rule.
If the DVD's are given away, demand is:
Q = 1600 - 200P.
at P = $0, The Quantity demanded (Q) will be 1600 units. (need to order)
Supplier A will charge $1200 + 2*1600: $4,400
Supplier B will charge 4*1600: $6,400.
Supplier A will charge less therfore must get the order.
Compute the maximum profit for each supplier by using:
Marginal Profit = Marginal Revenue - Marginal Cost.
Profit maximization ...
The calculations required for this question of pricing and promotion are displayed very clearly and easy to understand.