A company is contemplating the introduction of a new product with new packing to replace the existing product at much higher Price (P) or a moderate change in the composition of the etishng product with a new packaging at a small increase in price (P) or a small change in the composition of the existing product except the word "new" with a very small increase in price (P3). The three possible states of nature are : (i) high increase in sales (n), (ii) no change in sales (n), and (iii) decrease in sales (n3). The marketing department of the company calculated the payoffs in terms of yearly net profits from each of the strategies (expected sales). This is represented in the following table: Strategies States of Nature 113 1500 7000 3000 5000 4500 P2 P3 3000 3000 3000 Which strategy should the concerned executive choose on the basis of: (i) Maximin criterion, (ii) Laplace criterion ?

A company is contemplating the introduction of a new product with new packing to replace the existing product at much higher Price (P) or a moderate change in the composition of the etishng product with a new packaging at a small increase in price (P) or a small change in the composition of the existing product except the word "new" with a very small increase in price (P3). The three possible states of nature are : (i) high increase in sales (n), (ii) no change in sales (n), and (iii) decrease in sales (n3). The marketing department of the company calculated the payoffs in terms of yearly net profits from each of the strategies (expected sales). This is represented in the following table: Strategies States of Nature 113 1500 7000 3000 5000 4500 P2 P3 3000 3000 3000 Which strategy should the concerned executive choose on the basis of: (i) Maximin criterion, (ii) Laplace criterion ?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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A company produces and sells luxury goods and is able to control the demand for the product by varying the selling price. The relationship between price and demand is found to be: p=10-(42/D^2)+2Dwhere p is the price per unit in million dollars and D is the demand per year. The company is seeking to maximize its profit. The fixed cost is $59 million per year and the variable cost is $25 million per unit. The production capacity is 42 units per year, and the company produces at least 1 unit per month.a) Derive how to find the number of units that should be produced annually to maximize profit.b) What is the maximum profit per year?c) What is the annual breakeven point?d)What is the company’s range of profitable output per year?
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