The entry of a private entity into the water utility business has brought changes in operational processes. One particular example is that of Metro Dumaguete Water (MDW). The utility company is now planning to charge consumers based on peak and off-peak demand rates. On weekdays, peak times are during the early morning (4 to 7 am) and evenings (5 to 10 pm), while on weekends at 4 in the morning to 12 noon. MDW wanted to know the price that they should during those times (peak and off-peak). Based on early calculations, the monthly demand for water during each period is related to price as follows: Dp = 4.178 – 0.134Pp + 0.082Po Do = 2.673 – 0.159Po + 0.091Pp where, Dp and Pp are demand and price during peak times, while Do and Po are demand and price during off-peak times. In addition, it will costs MDW P82.50 per month to maintain one cubic meter of capacity considering the new equipment and gadgets that would be set up with regards to the plan. MDW wants to determine a pricing strategy, the capacity level that would maximize its monthly profit, and the expected profit. What is the expected profit based on the new pricing strategy and capacity level?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The entry of a private entity into the water utility business has brought changes in operational processes. One particular example is that of Metro Dumaguete Water (MDW). The utility company is now planning to charge consumers based on peak and off-peak demand rates. On weekdays, peak times are during the early morning (4 to 7 am) and evenings (5 to 10 pm), while on weekends at 4 in the morning to 12 noon.

MDW wanted to know the price that they should during those times (peak and off-peak). Based on early calculations, the monthly demand for water during each period is related to price as follows:

D_p = 4.178 – 0.134P_p + 0.082P_o

D_o = 2.673 – 0.159P_o + 0.091P_p

where, D_p and P_p are demand and price during peak times, while D_o and P_o are demand and price during off-peak times. In addition, it will costs MDW P82.50 per month to maintain one cubic meter of capacity considering the new equipment and gadgets that would be set up with regards to the plan.

MDW wants to determine a pricing strategy, the capacity level that would maximize its monthly profit, and the expected profit.

What is the expected profit based on the new pricing strategy and capacity level?

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