Problem
• Describe how goals, constraints, incentives, and market rivalry affect economic decisions.
• Evaluate and present the economic basis for limit pricing, and identify the conditions under which a firm can profit from such a strategy.
You are the owner of a local car dealership. Unlike other dealerships in the area, you take pride in your "no-haggle" sales policy. Last year, your dealership earned record profits of one million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is -1.5. In each of the last five years, your dealership has sold more midsized automobiles than any other dealership in the nation. This entitled your dealership to an additional 20 percent off the manufacturer's suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is $12,000.
What price should you charge for a midsized automobile if you expect to maintain your record profits?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.