A manufactures of a well-known T-shirt is considering changing the way he prices

Question

A manufactures of a well-known T-shirt is considering changing the way he prices his product. Currently, he is selling his T-shirt at $4.99 per unit. He hired a college professor of economics to estimate the demand function for the product. The demand function estimated by the professor is given as:      

            Qd = 3 - 0.25P                                                

     Where P represents the price per unit and Q represents quantity (in thousands)

     Do you think $4.99 per unit is the optimal (profit maximizing) price? why? Why not?

Explanation / Answer

Qd = 3 - 0.25P [ Where Qd = Quantity Demanded, P = Price per unit.]

Qd = 3 - 0.25 * 4.99

Qd = 1.7525 Units [ Since the units can not be fraction, thus 1.7525 is rounded off to 2 Units.]

Qd = 2 Units (Rounded off)

$ 4.99 is not an optimal price because Quantity demanded of 2 units of T-shirt at this price is very low. The price of T-shirt should be reduced from $ 4.99 so that quantity demanded of T-shirt increases in the market and thus the profitability of the manufacturer also increases because with the increase in quantity demanded of T-shirt in the market, manufacturer will be able to sell more and more units of the T-shirt and therefore, the profits of manufacturer will be maximized then.

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