Question: Suppose Ford currently sells 250,000 Ford Mustangs annually. The unit cost of a Mustang, including the delivery cost to a dealer, is $16,000. The current

Suppose Ford currently sells 250,000 Ford Mustangs annually. The unit cost of a Mustang, including the delivery cost to a dealer, is $16,000. The current Mustang price is $20,000, and the current elasticity of demand for the Mustang is –1.5.

a. Determine a profit-maximizing price for a Mustang. Do this when the demand function is of the constant elasticity type. Do it when the demand function is linear.

b. Suppose Ford makes an average profit of $800 from servicing a Mustang purchased from a Ford dealer. How do your answers to part a change?

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