Summary 57The firm estimates that its additional profit from service and supplies is
about $300 over the life of each copier sold.
There is disagreement in management about the implication of this
tie-in profit. One group argues that this extra profit (though significant for
the firm’s bottom line) should have no effect on the firm’s optimal output
and price. A second group argues that the firm should maximize total
profit by lowering price to sell additional units (even though this reduces
its profit margin at the point of sale). Which view (if either) is correct?- Suppose the microchip producer discussed in this chapter faces
demand and cost equations given by Q 8.5 .05P and C 100
38Q. Choosing to treat price as its main decision variable, it writes
profit as
Derive an expression for Md/dP. Then set M0 to find the
firm’s optimal price. Your result should confirm the optimal price found
earlier in the chapter.- Modifying a product to increase its “value added” benefits customers
and can also enhance supplier profits. For example, suppose an
improved version of a product increases customer value added by $25
per unit. (In effect, the demand curve undergoes a parallel upward
shift of $25.)
a. If the redesign is expected to increase the item’s marginal cost by $30,
should the company undertake it?
b. Suppose instead that the redesign increases marginal cost by $15.
Should the firm undertake it, and (if so) how should it vary its
original output and price? - Suppose a firm’s inverse demand and cost equations are of the
general forms P a bQ and C F cQ, where the parameters a
and b denote the intercept and slope of the inverse demand function
and the parameters F and c are the firm’s fixed and marginal costs,
respectively. Apply the MR MC rule to confirm that the firm’s
optimal output and price are: Q (a c)/2b and P (a c)/2.
Provide explanations for the ways P and Q depend on the underlying
economic parameters.
*14. Under the terms of the current contractual agreement, Burger Queen
(BQ) is entitled to 20 percent of the revenue earned by each of its
423 10.4P.05P^2.
[P(8.5.05P)][100(38)(8.5.05P)]
RC
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