Background: A firm currently charges its customers $12/unit for its product. The firm sells 12,000 units per week at this price. It costs the firm $4/unit to produce each product. The firm earns $96,000 in weekly profit ([$12 - $4] x 12,000). After reviewing the firm's records, your group realizes that the firm serves two distinct customer groups: Low demanders and High demanders. You estimate that low demanders buy four units each week and high demanders purchase eight units each week. You estimate that there are 1,000 members in each group. After examining the data, your group estimates linear demand curves for the high and low demanders. (See image).TASK: Your group anticipates that management is interested in whether changes in the relative number of high and low demanders affects the profitability of its pricing strategy and the prices that maximize firm profits. To address this issue, each group should include an additional analysis that shows how changing the relative number of high and low demanders affects profit-maximizing prices. Specifically, each group should produce profit estimates for per-unit prices that equal: $10, $12, $14, $16, and $18 in a market that includes 500 high-demand customers and 1,500 low-demand customers.Each group should produce a second set of profit estimates when the market includes 1,500 high-demand customers and 500 low-demand customers. You can compare these estimates with your finding for question #1 where there were 1,000 high demanders and 1,000 low demanders. Your group should use these estimates to explain how changing the relative number of high and low demanders affects the profit-maximizing prices associated with this pricing strategy.Explaining the trade-off in profits between high and low demanders that takes place when the per-unit price is increased is the key to this discussion. Each group should explain how raising the per-unit price affects the profit the firm earns from individual low and high demanders. Groups can use this discussion to explain how changing the relative number of high and low demanders affects the profit-maximizing per-unit and bundle prices. Each group is expected to produce a short report that presents your estimates and includes a verbal discussion of how the pricing plan works. Memos should include a short introduction, a main body that explains your group's findings, and a conclusion that leaves your client with a concise summary of your findings and why your recommendations will increase the client's profits.
