You are the CEO of a company that advises clients on pricing strategies. Bilbo B

Question

You are the CEO of a company that advises clients on pricing strategies. Bilbo Baagins is a profit maximizing client who produces uniquely styled shoes and hires you for pricing advice. Below are the demand and marginal revenue (MR) curves faced by Bilbo's company for two different groups of consumers. Assume Bilbo can prevent the reselling of his shoes, faces constant marginal cost (MC) equal to $20 per pair, can identify varying consumer groups, and has no fixed costs (so. MC = ATC). Use the graph to answer the questions below: Bilbo asks what Price he should charge. You respond. He should shutdown in the short run because he will not be able to cover his variable costs of $10, 000. He should price discriminate and produce where P = MC and charge $20 per pair. He should produce where MR = MC and charge $70 per pair. He should charge the more elastic group $60 per pair and the less elastic group $70 per pair. Calculate Bilbo's profit. $20, 000 52,000 $7,000 $21,000

Explanation / Answer

Answer (1) He should charge the more elastic group $60 per pair and the less elastic group $70 per pair.

2) Bibo's profit

For Demand 1

MC= $20

Qty= 400

MC=MR

When we extend this upward to touch the Demand curve then the price is $60. Therefore at $60 revenue is equal to 60*400=24000. Similarly cost is 20 per unit. Therefore for 400 units cost is equal to 8000. Therefore, profit is equal to 24000-8000=16000

For Demand 2, quantity is 100. At Price of 70, revenue is 70*100=7000 and Cost is 20*100=2000 Therfore, profit is 5000.

Thus, toal profit is 5000 (for demand 2) and 16000 for (demand 1). Thus, total profit is $21000

Answer is $ 21000

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