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Optimal Pricing for an Aggregate Demand Curve The table below shows the hypothetical prices and quantities demanded of a software product. Assume that the fixed cost of setting up the production of software is $200 and the marginal cost is $5.

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Optimal Pricing for an Aggregate Demand Curve

The table below shows the hypothetical prices and quantities demanded of a software product. Assume that the fixed cost of setting up the production of software is $200 and the marginal cost is $5.

  • Fill out the table by calculating the revenue, the marginal revenue, the marginal cost, and the profit.
  • Give a general definition of price elasticity of demand. Explain the factors that make the demand of the product more elastic.
  • Calculate the own price elasticity of increasing the price from $0 to $5, from $5 to $10, etc., from $35 to $40. In which price region is the demand for the product elastic and in which region is it inelastic?
  • Conduct a stay even analysis by calculating the critical loss from increasing the price from $30 to $35. How much business can the software company afford to lose by increasing the price in order to maintain its profit?

Solution:

Price ($) Quantity sold Revenue TC MR MC Profit Elasticity
40 0 o 0
35 10 350 350
30 20 600 250
25 30 750 150
20 40 800 50
15 50 750 -50
10 60 600 -150
5 70 350 -250
0 80 0 0
 
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