1. Suppose as a manager of a profitable department store you are con- fronted wi

Question

1. Suppose as a manager of a profitable department store you are con- fronted with a pricing problem. You have two types of customers: a high-end type that are willing to pay a price of $25 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $15 for the same pair of jeans. Your marginal costs are $13 per jeans. Your survey of your customers for jeans tells you that 60% of your customers are of the high end type and 40% are of the low end type. (a) If you decided to price high, what would be your expected profits per unit. (b) If you decided to price low, what would be your expected profits per unit. (c) Which pricing will you choose, based on the expected pricing per unit.

Explanation / Answer

if price high, expected profit per unit
= 60% * (25 - 13) = 60% * 12 = $7.2

if price low, expected profit per unit
= 40% * (15 - 13) = 40% * 2 = $0.8

Expected profit per unit high for the high pricing of 25$, so I would choose that.

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