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Optimal pricing for an aggregate demand curve

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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


Reference no: EM131055027

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