Suppose Ford currently sells 250,000 Ford Mustangs annually. The unit cost of a Mustang, including the delivery cost to a dealer, is $16,000. The current Mustang price is $20,000, and the current elasticity of demand for the Mustang is -1.5.
a. Determine a profit-maximizing price for a Mustang. Do this when the demand function is of the constant elasticity type. Do it when the demand function is linear.
b. Suppose Ford makes an average profit of $800 from servicing a Mustang purchased from a Ford dealer. (This is an average over the lifetime of the car.) How do your answers to part a change?