Heat Co is now trying to ascertain the best pricing policy that they should adopt for the Energy Buster’s launch onto the market. Demand is very responsive to price changes and research has established that, for every $15 increase in price, demand would be expected to fall by 1,000 units. If the company set the price at $735, only 1,000 units would be demanded.
The costs of producing each air conditioning unit are as follows:
Note
The first air conditioning unit took 1·5 hours to make and labour cost $8 per hour. A 95% learning curve exists, in relation to production of the unit, although the learning curve is expected to finish after making 100 units. Heat Co’s management have said that any pricing decisions about the Energy Buster should be based on the time it takes to make the 100th unit of the product. You have been told that the learning co-efficient, b = –0·0740005.
All other costs are expected to remain the same up to the maximum demand levels.
Required:
(a) (i) Establish the demand function (equation) for air conditioning units; (3 marks)
(ii) Calculate the marginal cost for each air conditioning unit after adjusting the labour cost as required by the note above; (6 marks)
(iii) Equate marginal cost and marginal revenue in order to calculate the optimum price and quantity. (3 marks)
(b) Explain what is meant by a ‘penetration pricing’ strategy and a ‘market skimming’ strategy and discuss whether either strategy might be suitable for Heat Co when launching the Energy Buster. (8 marks)
Which of the following statements is TRUE based on the text?
A.The world now seems smaller because of faster communication.
B.The world is actually smaller today.
C.The world is changing in size.
D.The distance between England ana America has changed since the War of 1812.