Question

You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take pride in your "No Haggle" sales policy. Last year, your dealership earned record profits of $1.5 million. However, according to the local Chamber of Commerce, your earnings were 10 percent less than either of your competitors. In your market, the price elasticity of demand for midsized Honda automobiles is 4.5. In each of the last five years, your dealership has sold more midsized automobiles than any other Honda dealership in the nation. This entitled your dealership to an additional 30 percent off the manufacturer’s suggested retail price (MSRP) in each year. Taking this into account, your marginal cost of a midsized automobile is $11,000. What price should you charge for a midsized automobile if you expect to maintain your record sales?

Answer 1

Answer:

$11880

Explanation:

Given that:

In a local Honda Dealership;

Last year, your dealership earned a record profits of $1.5 million

according to the local Chamber of Commerce, your earnings were 10 percent less than either of your competitors.

The Price Elasticity of demand E = - 4.5

Marginal cost of a midsized automobile = $11,000

Let assume that In your market, you compete against two other dealers

From The above given data , the objective is to determine the What price should you charge for a midsized automobile if you expect to maintain your record sales.

So; in order to achieve that ; we consider the scenario of an Oligopoly market by using the markup formula for homogeneous product Cournot Oligopoly which can be represented as:

$P = (\dfrac{n*E}{1+ n*E})*MC$

$P = (\dfrac{3*(-4.5)}{1+(3*-4.5)})*11000$

$P = (\dfrac{-13.5}{1+(-13.5)})*11000$

$P = (\dfrac{-13.5}{-12.5})*11000$

P = 1.08 × 11000

P = $11880

Hence. the price you should charge for a midsized automobile if you expect to maintain your record sales is $11880