BACC 111 (BASIC MICROECONOMICS)

II. PROBLEMS

The manager of a sole distributorship for a famous brand of automobiles was discussing

with the assistant manager the planned introduction by mid-year of a new model, the

XP-60. It was decided earlier that the price be set at P400,000, at which level the total

number of units sold was estimated at 500 units annually. The assistant manager has

suggested that the price should be set at a somewhat lower level, say, at P360,000 in

order to attract a major segment of the non-targeted market. At this lower price, 1,000

units are expected to be sold.

Data: Price Quantity

400,000 500

360,000 1000

1. Formulate the firm's linear demand equation for model XP-60 of a famous

automobile brand given the estimates and projections made by the manager.

2. Will total revenue increase as a result of the decision to reduce the price? How do

you know? If so, by how much?

3. Determine the TR function. From this function, determine the TR values given the

two prices.

4. What is the (point) price elasticity of demand at price P400,000? At P360,000?

Interpret the results.

5. What is the arc price elasticity of demand between these two prices? Interpret the

result.

6. What price and quantity combination will the firm realize the maximum TR?