You are the owner of a local Honda dealership. Unlike other dealerships in the a

Question

You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your “No Haggle” sales policy. Last year, your dealership earned record profits of $1.9 million. In your market, you compete against two other dealers, and the market-level price elasticity of demand for midsized Honda automobiles is -1.2. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealership in the nation. This entitled your dealership to an additional 40 percent off the manufacturer’s suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is $11,000.

What price should you charge for a midsized automobile if you expect to maintain your record sales?

Instruction: Round your answer to two decimal places.

Explanation / Answer

As we know that in case of three oligopoly firm market, we will calculate the profit maximizing price will be determined by the following formula-

P = [N * EM / (1 + N * EM)] * MC

Where,

N = number of firms

EM = Price elasticity of demand

MC = marginal cost

So, in the question, given,

N = 3 (No. of firms in the market is 3) and EM =- 1.20 and MC = $11,000

Now if we put the values in the formula, we will get,

P = [3 * (- 1.20) / {1 + 3 * (-1.20)}] * $11,000 = $15230.77.

P = $15230.77

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