A B C D E F G H I J K L M N O P

1 Pricing complementary products

2
3 Suits Complementary products
4 Current price $350 Ties Shirts
5 Current demand 300 Units sold per suit 1.5 2 Part a:
a: This
Thisisisaa beautiful
beautiful model.
model. (Look
(Look at
at its
its formulas.)
formulas.) However,
However, Solver
Solver tells
tellsus
usitit
Part
6 Unit cost suits $320 Unit cost ties shirts $20 $15 doesn't converge,
doesn't converge,as as indicated
indicated byby the
thehuge
hugevalues
valuesin in the
the###### columns.
columns. TheThereason
reason isis
7 thatthere
that thereisisno no upper
upper limit
limitononthe
the price
priceof
of ties
tiesand
and shirts.
shirts.Therefore,
Therefore, the
the model
model
allowsthese
allows theseprices
pricesto
to increase
increaseindefinitely.
indefinitely. The
Theeffect
effect isisthat
thatthere
thereisis no
no separate
separate
8 Demand function Constant Elasticity demand for for ties
ties and
andshirts
shirts(because
(becausethetheprices
prices arearesoso high),
high),but
butfor
for any
any reasonable
reasonable
demand
9 Constant 687,529,545 Demand function 75460 288500 price of
price of suits,
suits, plenty
plenty of
ofties
tiesand
and shirts
shirtswill
will be
be sold
sold for
for astronomical
astronomical prices.
prices.
10 Elasticity -2.5 -1.6 -1.7
To get
To get aareasonable
reasonable model,
model, you
you have
have to
to put
put some
some upper
upper bound
boundon
on the
theprices
pricesof
ofthe
the
11
ties and
ties andshirts.
shirts. Or
Or you
youcould
could do
do what
whatisis suggested
suggested in
in part
partb.b.
12 Suit sales Tie, shirt sales (separate from sales of suits)
13 Price of suits $320.00 Prices of ties, shirts ### ### Part b:
Part b: You
Youcould
couldimpose
imposesomesomesort
sortofofsliding
slidingscale.
scale.For
Forshirts,
shirts,say,
say,you
youmight
might
14 Demand 375.3 Demand 0.0 0.0 assumethat
assume thatwhen
when the
theprice
price of
of shirts
shirts isisno
no greater
greater than
than $25,
$25,customers
customers will
will buy
buy 22
shirtson
shirts on average
average per
per suit.
suit. When
When thetheprice
price isisbetween
between$25 $25 and
and $35,
$35, customers
customerswillwill
15 Profit from suits only $0 Profit $0 $0 buy only
buy only 11 shirt
shirton
on average
averageperpersuit.
suit. And
And whenwhen the
theprice
priceisisover
over$35,
$35, customers
customers
16 Profit from shirts and ties ### won't buy
won't buy any
any shirts
shirts with
with suits.
suits. This
Thiswouldn't
wouldn'tbe be too
too difficult
difficult to
to model,
model, and
and ititwould
would
17 result in
result in aabounded
bounded solution,
solution, because
becausethere therewould
would nono longer
longer bebe an
anincentive
incentive toto
price shirts
price shirtsandand ties
ties so
so high.
high.
18 Total profit ###
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