Exercise 1

Question

The marketing manager has estimated the company’s demand curve with the equation P=3000 – 40Q. To develop a deeper understanding of pricing and quantity to be produced, complete the following analyses:
1. Draw the demand curve (use a range of Q values from 20 to 60).
2. Calculate revenue variation with quantity and determine the price that maximizes revenue.
3. Calculate price elasticity of demand. At what quantity the demand is unit-elastic? Identify the elastic and inelastic range for demand.
4. What price and quantity would you recommend to your CEO?

Exercise 2
Your company is considering a price reduction on a product which currently sells for the price of $5.00. You know the price elasticity for the product is roughly equal to -2.3 over the range being considered for the price change. The product has been selling at the brisk pace of 500 per week. To increase market share, you would like to increase sales to 750 per week. What price should you set?

Exercise 3
We know that the demand curve always slopes downward. Your friend shows you a demand diagram for “prestige goods” that has an upward demand curve. He argues that for prestige goods the higher the price, the greater the demand for the product. You know the demand curve cannot slope upward. How can you explain the diagram your friend is showing you for prestige goods?