The Best Buy Company, Inc., is a leading specialty retailer of consumer electronics, personal computers, entertainment software and appliances. The Company operates retail stores and commercial Web sites, the best known of which is bestbuy.com. Recently, this site offered a Home Theater unit with a 5-disc DVD player, MP3 playback, and digital AM/FM. At a price of $1,100, weekly sales totaled 2,500 units. After a $100 online rebate was offered, weekly sales jumped to 5,000 units.
Using these two price-output combinations, the relevant linear demand and marginal revenue curves can be estimated as:
P = $1,200 - $0.04Q and MR = $1,200 - $0.08Q
A. Calculate the revenue-maximizing price-output combination and revenue level. If Best Buy’s marginal cost per unit is $800, calculate profits at this activity level assuming TC = MC × Q.
B. Calculate the profit-maximizing price-output combination. Also calculate revenues and profits at the profit-maximizing activity level.