AEM 4150
Price Analysis
Fall Semester 2009
Homework Assignment 5
Suggested Solutions
Problem 1
(a) (2 points)
PROM = 30,000,000
INC = 38,000
The demand equation becomes
Qd = 60 – 0.30P + 0.004(38,000) + 0.0000008(30,000,000)
Qd= 60 – 0.3P + 152 + 24
Qd= 236 – 0.30P
In equilibrium,
Qd* = Qs*, hence
236 – 0.3P = 5P
P* =
44.53
Q* = 5 (44.53) (10,000), or Q* =
2,226,500
Total Revenue (TR) = P*Q*=
99,146,045
TR – Promotion Costs = 99,146,045 – 30,000,000=
69,146,045
(b) (2 points) Similarly,
PROM = 0
INC = 38,000
The demand equation becomes:
Qd = 60 – 0.30P + 0.004(38,000) + 0
Qd = 60 – 0.30P + 152
Qd= 212 – 0.30P
In equilibrium,
Qd* = Qs* hence
212 – 0.30P = 5P
P* =
40
Q* = 5 (40) (10,000)=
2,000,000
Total Revenue (TR) = P*Q*=
80,000,000
TR – Promotion Costs = 80,000,000 – 0 =
80,000,000
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