US Auto Company would like to offer rebates to its customers in order to increase sales. If it lowers prices sales will increase. This will depend on the price elasticity of demand. Assume that the price elasticity of demand is 1.5. This firm is considering a $400 rebate on its cars. Also assume the following information on prices and costs before the rebates: Average price per car $9,000 per car Expected sales volume at $9,000) per car 1,000,000 cars Average total costs per car $8,200 per car Total variable cost $6,400,000,000 Calculate the present total fixed costs, average variable costs and average fixed costs. What is the present breakeven point? What is the change in revenue resulting from the $400 price reduction? What is the effect on the cost per car after the change? In other words what is the average cost per car after the change? Should the change be made?

US Auto Company would like to offer rebates to its customers in order to increase sales. If it lowers prices sales will increase. This will depend on the price elasticity of demand. Assume that the price elasticity of demand is 1.5. This firm is considering a $400 rebate on its cars. Also assume the following information on prices and costs before the rebates: Average price per car $9,000 per car Expected sales volume at $9,000) per car 1,000,000 cars Average total costs per car $8,200 per car Total variable cost $6,400,000,000 Calculate the present total fixed costs, average variable costs and average fixed costs. What is the present breakeven point? What is the change in revenue resulting from the $400 price reduction? What is the effect on the cost per car after the change? In other words what is the average cost per car after the change? Should the change be made?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter12: More Realistic And Complex Pricing

Section: Chapter Questions

Problem 12.1IP

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