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Efa Assignment 4

1. The document is an assignment response that analyzes pricing strategies for Amazon's Kindle e-reader. It checks that two sample price-quantity points satisfy the Kindle's inverse demand curve equation. 2. By applying the MR-MC rule, it finds that profits are maximized at an output of 2.4 million units sold at a price of $210. 3. Factoring in $100 of additional e-book revenue per Kindle, total profits are maximized at 3.829 million units sold at a lowered price of $160, as the additional e-book sales offset the reduced hardware profits. This implies Amazon should lower Kindle prices to drive higher e-book sales volume.

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Yonas D. Ebren
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
74 views

Efa Assignment 4

1. The document is an assignment response that analyzes pricing strategies for Amazon's Kindle e-reader. It checks that two sample price-quantity points satisfy the Kindle's inverse demand curve equation. 2. By applying the MR-MC rule, it finds that profits are maximized at an output of 2.4 million units sold at a price of $210. 3. Factoring in $100 of additional e-book revenue per Kindle, total profits are maximized at 3.829 million units sold at a lowered price of $160, as the additional e-book sales offset the reduced hardware profits. This implies Amazon should lower Kindle prices to drive higher e-book sales volume.

Uploaded by

Yonas D. Ebren
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment

By
Efrem Woldemaryam ID

\
Submitted to:-
1
Queen’s College
Assignment
Date:-
1. The sales figures listed above imply that the Kindle’s (linear) inverse demand
curve is described by the equation: P= $294= 35Q. Check that the two quantity-
price points (Q=1 million at P =$259 and Q =3 million at P= $189) satisfy this
equation.

Answer:- Plugging each quantity value into the inverse demand equation generates
the corresponding market-clearing price. From the inverse demand equation, we
have
P=$ 294−35 Q
Thus,

For P=259 and Q=1, the equation holds true


259=294−35(1)

259=259

For P=189 and Q=3 , the equation also holds true.


189=294−35(3)

189=189

2. The marginal cost of producing the Kindle is estimated at $126 per unit. Apply
the MR –MC rule to find the output and price that maximize Kindle profits.

Answer:- From the price equation P=$ 294−35 Q , it follows that


MR=$ 294−70Q .
Setting MR=MC=$ 126 implies,
Q=2.4 million units∧P=$ 210.

2
Queen’s College
Assignment
3. Considering that each Kindle sold generates $100 in e-book profits, determine
Amazon’s Optimal quantity and price with respect to the total profit generated
by Kindle and e-book sales. What is the implication for Amazon’s pricing
strategy?

Answer:- Adding $100 in e-book net revenue means that Amazon’s MR equation
would be:
MR=$ 394−70Q .
And for MR=MC , implies that Q=3.829 million units.

In order to sell this volume, Amazon must lower its price to:
P=294−(35)(3.829)−$ 160.
We can see that, by lowering its price margin, Amazon is deliberately sacrificing
profit at the point of sale. But it is more than making up for it by way of additional
e-book profit.

3
Queen’s College
Assignment

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