Question

Nicklos Corporation's marketing manager believes that every 5% decrease in the selling price of one of the company's products would lead to a 8% increase in the product's total unit sales. The product's absorption costing unit product cost is $18.10. The variable production cost is $6.60 per unit and the variable selling and administrative cost is $3.90.

Required:
a.	Compute the product's price elasticity of demand as defined in the text. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price elasticity of demand

b.	Compute the product's profit-maximizing price according to the formula in the text. (Round your intermediate and final answer to 2 decimal places. Omit the "$" sign in your response.)

Profit-maximizing price

$

Answer 1

Answer:

(a)

Price elasticity of demand = % decrease in unit sales / % increase in price

= 5% / 8%

= 12.5

(b) Lerner index (LI) = - 1 / Price elasticity = - 1 / - 1.88 = 0.53

Unit variable cost = $( 6.60 + 3.90) = $ 10.5

LI = (Price - Unit variable cost) / Price

0.53 = (Price - 10.5) / Price

0.53 x Price = Price - 10.5

Price x (1 - 0.53) = 10.5

Price x 0.47 = 10.5

Price = $ 22.34

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