Question

Suppose as a manager of a profitable department store you are confronted with a pricing problem. You have two types of customers: a high-end type that are willing to pay a price of $20 for a pair of Levis Jeans, and a low-end type customer that are willing to pay a price of $13 for the same pair of jeans. Your supplier provided you with the jeans at MC of $11 per jeans. Your survey of your customers for jeans tells you that 50% of your customers are of the high end type and 50% are of the low end type.

(a) If you decided to price high, what would be your expected profits per unit.

(b) If you decided to price low, what would be your expected profits per unit.

(c) Suppose your store attracts 1000 customers for these jeans: will you price high or low? Explain briefly.

Answer 1

a) If we decide to price high, then only the high end type customers will buy the jeans. So, the expected profit per unit would be $20 - $11 = $9.

b) If we decide to price low, then both the high end and low end type customers will buy the jeans. So, the expected profit per unit would be $13-$11 = $2.

c) If there are 1000 customers, and we keep the high prices, then only 50% of the total customers, that is, 500 customers would buy the jeans. So, the profit would be = 500*$9 = $4500

If we choose to keep low prices, then all the customers, that is , 1000 customers would buy the jeans. So, profit would be = 1000* $2 = $2000

So, we can see that the department store will be more profitable if it keeps the high prices. So, the manager should keep the prices to be $20 per unit and the total profit that will be earned is $4500.

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