Question

Suppose that you wanted to purchase a product and sell it at your online store. You must order the product in advance (say, Q units) and you have space for up to 30 units only.
You can get the product for a price of $2 per unit. However, the supplier has a great deal going on, offering a 96% discount, if one buys 10 units or more (The discount works as follows: the buyer pays FULL PRICE ON THE FIRST 10 UNITS AND THEN RECEIVES A DISCOUNT OF 96% ON ALL ADDITIONAL UNITS).

In addition to the procurement decision, you need to set the price.

By policy, you want to limit yourself to a fixed price, that never changes.

A study you have conducted shows that in order to sell Q units, your price must be (4 ‐ 0.15*Q).

Example: If you purchase 20 units, your cost would be 10*$2+10*$2*0.04 = $20.8; if you wanted to sell the 20 units, the price would have to be: $4 ‐ $0.15*20 = $1, and your revenue would be 20*$1 = $20.

Questions:

1. What is the firm's optimal order quantity? (Assume that the firm can only order WHOLE units, i.e., Q=1,2,3, ... etc.)?

a. 6

b. 7

c. 13

d. 14

2. Can you profit by selling fewer units than what you purchase?

a. True

b. False

3. What would be the firm's demand if it charged a retail price of zero?

a. 20 units

b. 22.25 units

c. 26.666 units

d. 28.3546 units

Answer 1