Problem: 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 DVD. Supplier B has 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.)
Q1. Suppose the station plans to give the DVDs away. How many should it order? From which supplier?
Q2. Suppose the station instead seeks to maximize profits from sales of the DVDs. What price should it charge? How many DVDs should it order from which supplier? Solve two separate problems and compare profits. Apply the Marginal Revenue (MR)=Marginal Cost (MC) rule.