Assignment 2, (15%)

1. Demand Curves. ISHO-garment is contemplating a T-shirt advertising promotion.

Monthly sales data from T-shirt shops marketing indicate that 𝑄 = 1,500 – 200𝑃 where Q
is T-shirt sales and P is price.

a. How many T-shirts could ISHO-garment sell at $4.50 each?

b. What price would ISHO-garment have to charge to sell 900 T-shirts?
c. At what price would T-shirt sales equal zero?
d. How many T-shirts could be given away?
e. Calculate the point price elasticity of demand at a price of $5

Solution
a. Quantity of T-shirts at the price $4.50 is:

Q = 1,500 – 200*4.5 = 600 (T-shirts)

b. Price for selling 900 T-shirts is:

900 = 1,500 – 200P

200P = 600
P = $3

c. T-shirts sales equal zero at the price:

1,500 – 200P = 0
200P = 1,500
P = $7.5
d. How many T-shirts could be given away?
I assume could be given away is “for free” P=0
𝑄 = 1,500 – 200𝑃
Q= 1500-200*0
Q= 1500
e. Quantity at the price of $5:

Q = 1,500 – 200*5 = 500 (T-shirts)

Price elasticity of demand:
 ∆Q ∆Q
∗P 1 ∗P 1
Q2−Q1 Q 1 ∆P
∈ P= = =
Q1 ∆P Q1
P 2−P 1
P1
Therefor when P=$ 5 ,Q=1,500 – 200∗5=500 ( T −shirts )

∆Q
is the marginal change∈quantity following a 1unit change ∈price ,=−200
∆P

∈ 5 −10 ∈ p=¿−2 ¿
p=¿−200 × = ¿
500 5

2. Optimal Pricing. In an effort to reduce excess end-of-the-model-year inventory, Harrison

Ford offered a 2.5% discount off the average list price of Focus SE sedans sold during the
month of August. Customer response was enthusiastic, with unit sales rising by 10% over the
previous month’s level.

A. Calculate the point price elasticity of demand for Harrison Ford Focus SE sedans.
B. Calculate the profit-maximizing price per unit if Harrison Ford has an average wholesale
cost of $10,000 and incurs marginal selling costs of $875 per unit.

Solution:
A. Point price elasticity of demand for Harrison Ford Focus SE sedans:

percentage change Quantity ( Q ) %∆Q

∈ P= ¿
percentage change∈unit price ( P ) %∆P
Change∈units sales of quantity =10 %
Change∈average price=−2.5 % becouse it indicates discount
10 % 10 4
= = =¿ - 4
−2.5 % −2.5 1

B. The profit maximizing price or optimal Price can be determined by equating marginal
costs with marginal revenue. MC=MR

1
MR=P 1+ ( ∈P )
1
therefore , MC=P 1+ ( ∈P )
 MC
Profit maximizing p∗¿
1
(1+ )
∈P
MC
Profit maximizing P∗¿
1
(1+ )
∈P

MC=$ 875

$ 875+ $ 10,000 $ 875

∈ P=4 1 3 p∗¿ $ 14,500
(1+
−4 ) 4