In this part you will be setting a single price for physician
services to maximize profits. All you observe is the price, which you set, and the resulting quantity demanded. To solve this problem, you should calculate the profit using a formula that ties to the given values for fixed cost, marginal cost, price, and quantity demanded. Once you have that formula, you can change the price to see how it affects profits.
While you could simply iterate until you hit on a high profit (or minimized loss), you can also generate the (P, Qd) data needed to estimate the price elasticity of demand. Once you have that estimate, you can use a markup formula to get a price. In this part of the assignment, the elasticity isn't constant along the demand function, so the markup pricing rule will only get you close to the profit-maximizing price. You don't need to set the price to the penny. Getting within $0.25 of the profit-maximizing price is sufficient.
The markup rule for profit maximization states that, when profits are maximized, P = MC*(elasticity/(1+elasticity)), where the elasticity is given as a negative value.
Fixed cost: 150,000 This is per month.
Marginal cost (constant): $50.00 Note: total variable cost is MC x Qd
Price: $50.00 <=== Change the price here.
Qd 14,455 <=== and the quantity demanded will appear here.
In Moodle, report the following:
2 Quantity demanded