5. You are a division manager at Toyota. If your marketing department estimates

Question

5. You are a division manager at Toyota. If your marketing department estimates that the semiannual demand for Highlander is Q = 60,000 ?0.75P, what price should you charge in order to maximize revenue from sales of the Highlander? Use the price elasticity of demand in answering this question.

6. The Potomac Range Corporation manufactures a line of microwave ovens costing $400 each. Its sales have averaged about 5,500 units per month during the past year. In August, Potomac’s closest competitor, Spring City Stove Works, cut its price for a closely competitive model from $580 to $500. Potomac noticed that its sales volume declined to 4,000 units per month after Spring City announced its price cut. A) What is the arc cross elasticity of demand between Potomac’s oven and the competitive Spring City model? B) Would you say that these two firms are very close competitors? What other factors could have influenced the observed relationship? C) If Potomac knows that the arc price elasticity of demand for its ovens is ?2.5, what price would Potomac have to charge to sell the same number of units it did before the Spring City price cut?

Explanation / Answer

(5)

Q = 60,000 - 0.75P

Revenue is maximized at mid-point of the linear demand curve where price elasticity of demand (Ep) is equal to -1.

Ep = (dQ/dP) x (P/Q)

-1 = -0.75 x [P / (60,000 - 0.75P)]

1 = 0.75 x [P / (60,000 - 0.75P)]

60,000 - 0.75P = 0.75P

1.5P = 60,000

P = 40,000

NOTE: As per Chegg Answering Policy, 1st question is answered.

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