Your pricing team has run an A/B test and determined that when the price of your product is $300 the quantity demanded is 100 units. However, when the price is $200 quantity demanded is 150 units.
Your procurement and warehousing team has also provided a best estimate of your costs. The fixed cost for rent is $1,000 / month. The variable cost to procure and ship your product is 8Q + 2Q²
Answer the following questions:
1)∆Qd/∆P=(150-100)/(200-300)=50/-100=-0.5
Qd at p=0, = 150+200*0.5=150+100=250
Demand function:Qd=250-0.5p
Inverse demand:p=500-2Q
2)
Total revenue=Q*(500-2Q)=500q-2*Q^2
Total cost=1000+8Q+2*Q^2
Profit=TR-TC
Profit=500q-2q^2-1000-8q-2q^2=492q-4q^2-1000
3)
Derivative of profit function with respect to Q to find profit maximizing quantity.
∆Profit/∆Q=492-8q
492-8Q=0
Q=492/8=61.5
At p=84
A)Qd=250-0.5*84=250-42=208
B)Elasticity of demand={∆Qd/∆p)*(P/Q)
Elasticity of demand=(-0.5)*(84/208)=-0.2
C)Because magnitude of elasticity of demand is lower than one ,it means demand is inelastic at this price,which means increase in price will lead to very low Decrease in quantity demanded,so as a result total Revenue will increase.
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