Problem: Suppose 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 $10 each and your extra costs are calculated at $1 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.
Question 1. If you decided to price high, what would be your expected profits per unit?
Question 2. If you decided to price low, what would be your expected profits per unit?
Question 3. Suppose your store attracts 1000 customers for these jeans: will you price high or low? And why?