Assignment
Optimal Pricing for an Aggregate Demand Curve
The table below shows the hypothetical prices and quantities demanded of a software product. Assume that the fixed cost of setting up the production of software is $200 and the marginal cost is $5.
- Fill out the table by calculating the revenue, the marginal revenue, the marginal cost, and the profit.
- Give a general definition of price elasticity of demand. Explain the factors that make the demand of the product more elastic.
- Calculate the own price elasticity of increasing the price from $0 to $5, from $5 to $10, etc., from $35 to $40. In which price region is the demand for the product elastic and in which region is it inelastic?
- Conduct a stay even analysis by calculating the critical loss from increasing the price from $30 to $35. How much business can the software company afford to lose by increasing the price in order to maintain its profit?
Solution:
|
Price ($)
|
Quantity sold
|
Revenue
|
TC
|
MR
|
MC
|
Profit
|
Elasticity
|
|
40
|
0
|
o
|
|
0
|
|
|
|
|
35
|
10
|
350
|
|
350
|
|
|
|
|
30
|
20
|
600
|
|
250
|
|
|
|
|
25
|
30
|
750
|
|
150
|
|
|
|
|
20
|
40
|
800
|
|
50
|
|
|
|
|
15
|
50
|
750
|
|
-50
|
|
|
|
|
10
|
60
|
600
|
|
-150
|
|
|
|
|
5
|
70
|
350
|
|
-250
|
|
|
|
|
0
|
80
|
0
|
|
0
|
|
|
|