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Metrics

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Submitted By soheyl15
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Homework Module Three: Pricing

1a. Given an anticipated 10% price increase and E= .3, being less than 1, it is inelastic. This means that customers are not sensitive to price change. Since E is inelastic price and quantity move in the same direction.

1b. TR= 50*10,000 = 500,000

TC= 15*10,000 = 150,000

1c.TR= 55 x 10300= 566500

CM= 55-35= 20

TC= 20 x 10300= 206,000

Yes we would recommend the increase in price because contribution margin increased by $56,000

1d. % Profit B/E

(50-55)/$15+(50-55) =.5 or 50%

1e. Quantity demanded would have to increase by at least 50% for the price change to be profitable.

1f. The two metrics offer different views. The elasticity metric tells us that the price change makes us more profitable; however, the break even profit metric tells us that the only way we can ensure a profit is to have our the quantity demanded increase by 50%. This sounds like a hard task to accomplish.

2a. Quantity demanded = 3,000 – 200(p)

0 = 3,000 – 200(p)

-3,000 = - 200(p)

-3,000/-200 = 15

Maximum reservation price = $15

$15 is the maximum price a customer will pay for a good

2b. Q = 3,000 – 200(0)

Q = 3,000

3,000 units is the maximum you will sell when the price is $0

2c. Optimal price = (15 + 2.50) / (2)

Optimal price = 17.50 / 2

Optimal price = $8.75

2d. Quantity demanded = 3,000 – 200(8.75)

Quantity demanded = 3,000 -1750

Quantity demanded = 1,250 units

Total revenue = 1,250 * 8.75 = $10,937.50

Contribution = 2.5 * 1,250

Contribution = 3,125

Overall contribution = 10,937.50 – 3,125

Overall contribution = $7,812.50

2e. Maximum contribution = $7.812.50

= 7,812.50 – 200(8.74)

= 7,812.50 – 1,748

= 6,064.50

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