1 The managers at Air Len are reviewing data on sandwichpurchases on ...

1. The managers at Air León are reviewing data on sandwich purchases on their flights to...

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Finance

1. The managers at Air León are reviewing data on sandwichpurchases on their flights to decide whether they should change theprice at which they sell sandwiches to their passengers flyingcoach. On a typical flight the airline sells 72 sandwiches whenthey charge $3 per sandwich. When they set a price of $6, they sell60 sandwiches per flight on average. If they set a price of $8, anaverage of 52 sandwiches are sold per flight. The airline managerswere careful in reviewing data for comparable flights, and believeno factors other than the price explained the differences observedin quantities purchased.
a) What is the equation for this demand curve (Q as afunction of p)?
b) Sandwiches are currently being sold on Air León flights for$11 and the marginal cost is $3. Check whether this satisfies theoptimal mark-up rule. Is $11 the profit-maximizing price? If so,why? If not, should the price be raised or lowered, and why?

Answer & Explanation Solved by verified expert

4.2 Ratings (683 Votes)

a) Equation of Demand Curve :

Q=a+bp

Q=Quantity Demanded

p=Price

b=(Change in Quantity)/(Change in Price)

a=Quantity intercept ie Quantity demanded at Price =0

p1=$3, Q1=72

p2=$8, Q2=52

b=(Change in Quantity)/(Change in Price)=(Q2-Q1)/(p2-p1)=(52-72)/(8-3)=-20/5=-4

Q=a-4p

p3=6, Q3=60

60=a-4*6

a=60+24=84

EQUATION FOR THE DEMAND CURVE:

Q=84-4p

Profit Maximizing Price ,

No, $11 is not Profit maximizing Price . $11 gives a profit of $320

Price of $12 will maximize Profit at $324, as shown below:Price needs to be raised.


Marginal Cost			$3
p	Q	A=(p-3)	B=Q*A
Price	Demand	Unit	Total
	(84-4*p)	Contribution	Contribution
$3	72	0	$0
$4	68	1	$68
$5	64	2	$128
$6	60	3	$180
$7	56	4	$224
$8	52	5	$260
$9	48	6	$288
$10	44	7	$308
$11	40	8	$320
$12	36	9	$324
$13	32	10	$320
$14	28	11	$308
$15	24	12	$288
$16	20	13	$260
$17	16	14	$224
$18	12	15	$180
$19	8	16	$128
$20	4	17	$68

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1. The managers at Air León are reviewing data on sandwichpurchases on their flights to decide whether they should change theprice at which they sell sandwiches to their passengers flyingcoach. On a typical flight the airline sells 72 sandwiches whenthey charge $3 per sandwich. When they set a price of $6, they sell60 sandwiches per flight on average. If they set a price of $8, anaverage of 52 sandwiches are sold per flight. The airline managerswere careful in reviewing data for comparable flights, and believeno factors other than the price explained the differences observedin quantities purchased.a) What is the equation for this demand curve (Q as afunction of p)?b) Sandwiches are currently being sold on Air León flights for$11 and the marginal cost is $3. Check whether this satisfies theoptimal mark-up rule. Is $11 the profit-maximizing price? If so,why? If not, should the price be raised or lowered, and why?