Optimal Pricing for an Aggregate Demand Curve The table below shows the hypothet
ID: 1213950 • Letter: O
Question
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.
A. Fill out the table by calculating the revenue, the marginal revenue, the marginal cost, and the profit.
B. Give a general definition of price elasticity of demand. Explain the factors that make the demand of the product more elastic.
C. 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?
D. Conduct a stay even analysis by calculating the critical loss from increasing the price from $30 to $35. How much business can the software company afford to lose by increasing the price in order to maintain its profit?
Solution: Please show all work.
Price ($)
Quantity sold
Revenue
MR
MC
Profit
Elasticity
40
0
35
10
30
20
25
30
20
40
15
50
10
60
5
70
0
80
Price ($)
Quantity sold
Revenue
MR
MC
Profit
Elasticity
40
0
35
10
30
20
25
30
20
40
15
50
10
60
5
70
0
80
Explanation / Answer
DEGREE OF RESPONSIVENESS OF QUANITITY DEMANDED TO A CHANGE IN PRICES IS CALLED PRICE OF ELASTICITY OF DEMAND.
Factors affecting price elasticity of demand
The number of close substitutes
The cost of switching between products
The degree of necessity or whether the good is a luxury
The proportion of a consumer's income allocated to spending on the good
The time period allowed following a price change
Whether the good is subject to habitual consumption
Peak and off-peak demand
The breadth of definition of a good or service
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