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 |
|
|
|
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