Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 17, Problem 17.4IP
To determine
The profit maximizing price.
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Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for possible future product and estimates that the reservation value is $250,000. Your dealings on the second-hand market lead you to believe that there is a 0.4 chance a random buyer will pay $300,000, a 0.25 chance the buyer will pay $350,000, a 0.1 chance the buyer will pay 400,000, and a 0.25 chance it will not sell. If you must commit to a posted price, what price maximizes profits?
Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company
could keep it in inventory for a possible future product and estimates that the reservation value is $200,000. Your dealings on the secondhand market
lead you to believe that if you commit to a price of $300,000, there is a 0.5 chance you will be able to sell the machine. If you commit to a price of
$400,000, there is a 0.2 chance you will be able to sell the machine. If you commit to a price of $500,000, there is a 0.1 chance you will be able to
sell the machine. These probabilities are summarized in the following table.
For each posted price, enter the expected value of attempting to sell the machine at that price. (Hint: Be sure to take into account the value of the
machine to your company in the event that you are not be able to sell the machine.)
Posted Price
Expected Value
($)
Probability of Sale
($)
$500,000
0.1
$
$400,000
0.2
$…
Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company
could keep it in inventory for a possible future product and estimates that the reservation value is $350,000. Your dealings on the secondhand market
lead you to believe that if you commit to a price of $400,000, there is a 0.4 chance you will be able to sell the machine. If you commit to a price of
$450,000, there is a 0.25 chance you will be able to sell the machine. If you commit to a price of $500,000, there is a 0.1 chance you will be able to
sell the machine. These probabilities are summarized in the following table.
For each posted price, enter the expected value of attempting to sell the machine at that price. (Hint: Be sure to take into account the value of the
machine to your company in the event that you are not be able to sell the machine.)
Posted Price
($)
$500,000
$450,000
$400,000
Probability of Sale
оо
$500,000
0.1
$450,000…
Chapter 17 Solutions
Managerial Economics: A Problem Solving Approach
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