Lizzie's Lingerie started selling robes for $36, adding a 50 per cent mark-up on cost. Costs were estimated at $24 each: the $10 purchase price of each robe, plus $6 in allocated variable overhead costs, plus an allocated fixed overhead charge of $8. Customer response was such that when Lizzie's raised prices from $36 to $39 per robe, sales fell from 54 to 46 robes perweek.
a. Estimate the optimal (profit-maximizing) pricing strategy assuming a linear demand curve.
b. Estimate the optimal pricing strategy assuming a power demand curve.
c. Explain why there is a difference between the above two strategies.
d. Estimate the size of the profit at both prices, assuming a power demand curve.
e. Estimate the optimal price if the cost of buying the robes rises from $10 to $11, assuming a power demand curve.