The profits that result from charging client with given per unit price is to be ascertained. Also to construct the report including recommendation resulting in higher profits.
Explanation of Solution
Demand function
Fixed Cost = $15000
Marginal Cost = $1000
Inverse demand function
Under
So, putting
Profits are -$2500.
Theprofits earned by charging client $1450 for first 10units and for additional units amount charged is $1225 is ascertained as follows:
When for the first 10 units amount charged is $1450 and for additional units amount charged is $1225. This is the case of second-degree price discrimination.
Quantity demanded at price $1450 can be calculated as
Quantity demanded at a price $1225 can be calculated as
Total units demanded at $1225 is 55 units but 10 units were sold at $1450. So, additional 45 units will be sold at $1225.
Profit is calculated as total cost subtracted by the total revenue.
Therefore, the profit earns is -$375.
The strategy that can be used for higher profits isexplained below:
An optimal and feasible recommendation will be Two-part pricing strategy.
Under this strategy, there would be a fixed fee plus a per unit fee for each unit of the software installed and maintained.
Per unit fee will be equal to $1000 which is a marginal cost
Quantity demanded at this price will be calculated as
Optimal fixed fee =
=
Profit under two-part pricing strategy will be $25000 - $15000
= $10000.
Profit under two-part pricing strategy is $10000.
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Chapter 11 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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