Assignment: A television station is considering the sale of promotional DVDs. It can have the DVDs produced by one of two suppliers. Supplier A will charge the station a set-up fee of $1,200 plus $2 for each DVDs; supplier B has the no set-up fee and will charge $4 per DVD. The station estimates its demand for the DVDs to be given by Q = 1,600 - 200P, where P is the price in dollars and Q is the number of DVDs. (The price equation is P = 8 - Q / 200).
- Suppose the station plans to give away the videos. How many DVDs should it order? From which supplier?
- Suppose instead that the stations seek to maximize its profits from sales of the DVDs. What price should it charge? How many DVDs should it order from which supplier?
- Hint: Solve two separate problems, one with supplier A and one with supplier B, and then compare profits. In each case, apply the MR = MC rule.
Assignment: The U.S. Cigarette industry has negotiated with Congress and government agencies to settle liability claims against it. Under proposed settlement, cigarette companies will make fixed annual payments to government based on their historical market shares. Suppose a manufacturer estimates its marginal cost at $1.00 per pack, its own price elasticity at -2, and sets its price at $2.00. The company's settlement obligations are expected to raise its average total cost per pack by about $.60. What effect will this have on its optimal price?