A company currently sells 1,000 units a year at $25 per unit. The marginal cost

Question

A company currently sells 1,000 units a year at $25 per unit. The marginal cost of each unit is $12. The company is considering lowering the price by 4%. The company believes that this price discount will increase its economic profits. It has also estimated that, at its current sales level, if price is increased by 1% then the quantity of units demanded by customers will drop 1.22%. You are a member of the marketing department that is making a final decision on this 4% price discount. Utilizing stay-even analysis, state whether you support this price discount and your reasoning for this position.

Explanation / Answer

profit maximizing condition is when MC=MR we know MC is 12. MR=P*Q and we know 1000units are sold a year at 1 unit per 25, or 25x set 25x=12 x=.48 Prices increased by 1% units will drop by 1.22% MR= 25.25x987.8= 24941.95 Decrease in MR= 25000-24941.95= $58.05

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