Gen Combo Managerial Economics & Business Strategy; Connect Access Card
Gen Combo Managerial Economics & Business Strategy; Connect Access Card
9th Edition
ISBN: 9781260044294
Author: Baye
Publisher: MCG
Question
Book Icon
Chapter 11, Problem 12PAA
To determine

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.

Expert Solution & Answer
Check Mark

Explanation of Solution

Demand function Qd=3000.2P

Fixed Cost = $15000

Marginal Cost = $1000

Inverse demand function

  0.2P=300Q

  P=15005Q

Under monopoly market, profit maximizing condition is written as:

  MC=MR

  TR=P×Q

  TR=(15005Q)×Q

  TR=1500Q5Q2

  MR=dTRdQ

  MR=150010Q

So, putting MC = MR

  1000=150010Q

  500=10Q

  50 units=Q

  P=15005Q

  P=15005×50

  P = $1250.

  Profit=(12501000)×5015000

   Profit =250×5015000

    Profit =$2500

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

  Qd=3000.2P

  =3000.2×1450

  =300290

  = 10 units.

Quantity demanded at a price $1225 can be calculated as

  Qd=3000.2P

  =3000.2×1225

  =300245

  =55 units

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.

  Profit=[(14501000)×10+(12251000)×45]15000

  Profit=[(450×10 +225×45]15000

  Profit=[4500+10125 ]15000

  Profit=1462515000

  Profit=$375

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

  Qd=3000.2P

   =3000.2×1000

   =300200=100 units

Optimal fixed fee = 12(1500  1000)×100 (when Q= 0, P = 1500)

  = 12×500×100

                               = $25000

Profit under two-part pricing strategy will be $25000 - $15000

  = $10000.

Profit under two-part pricing strategy is $10000.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
6. Rent seeking The following graph shows the demand, marginal revenue, and marginal cost curves for a single-price monopolist that produces a drug that helps relieve arthritis pain. Place the grey point (star symbol) in the appropriate location on the graph to indicate the monopoly outcome such that the dashed lines reveal the profit-maximizing price and quantity of a single-price monopolist. Then, use the green rectangle (triangle symbols) to show the profits earned by the monopolist. 18 200 20 16 16 14 PRICE (Dollars per dose) 12 10 10 8 4 2 MC = ATC MR Demand 0 0 5 10 15 20 25 30 35 40 45 50 QUANTITY (Millions of doses per year) Monopoly Outcome Monopoly Profits Suppose that should the patent on this particular drug expire, the market would become perfectly competitive, with new firms immediately entering the market with essentially identical products. Further suppose that in this case the original firm will hire lobbyists and make donations to several key politicians to extend its…
Consider a call option on a stock that does not pay dividends. The stock price is $100 per share, and the risk-free interest rate is 10%. The call strike is $100 (at the money). The stock moves randomly with u=2 and d=0.5. 1. Write the system of equations to replicate the option using A shares and B bonds. 2. Solve the system of equations and determine the number of shares and the number of bonds needed to replicate the option. Show your answer with 4 decimal places (x.xxxx); do not round intermediate calculations. This is easy to do in Excel. A = B = 3. Use A shares and B bonds from the prior question to calculate the premium on the option. Again, do not round intermediate calculations and show your answer with 4 decimal places. Call premium =
Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer. Show your work to receive credit. 6. What is the premium of a call with a higher strike. Show your work to receive credit; do not round intermediate calculations. S0 = $100, u=2, d=0.5, r=10%, strike=$150
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics
Economics
ISBN:9781337617390
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Micro Economics For Today
Economics
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Cengage,
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning