a. If the price elastic is greater than one, retails stores will benefit by reducing price. In this case, total revenue will increase as price decrease. Firm's profit will also increase, if cost of production remains same.
The revenue area OQ 2 BP 2 is greater than the revenue area OQ 1 AP 1
If the price elastic is equal to one, the retails stores has maximize the total revenue. Any change in price from that level of price will only leads to lower revenue.
If the price elastic is lesser than one, retails stores will incur losses by reducing the price. In this case, total revenue will decreased as price decrease. So, firm's profit will also decrease.
b. If manufacturers of these private-label products have relevant cost less than that of national brands, then the price of private-label are lesser than that of national brands. Thus, manufacturers will earn more profit.
If manufacturers of these private-label products have relevant cost equal to that of national brands, the price of private-label will then equal to national brands. Thus, there will not be any incentive earn extra profit.
If manufacturers of these private-label products have relevant cost higher than that of national brands, the price of private-label will be higher than national brands. Thus, manufacturers will incur loss.
If I were the manager of a national premium brand, first I would try to reduce the cost of the product by introducing use hi-tech machine and skilled labor force.
Second, to increase demand for the product demand I would try to produce better quality good and give combo offer with the product.
Given the demand equation:
a. The demand schedule is below
Price elasticity of demand for interval between $12.50 and $08.00 is less than one.
b. Students should not follow the advice of the store manager because the price elasticity is less than one. The percentage decrease in price is not followed by much decrease in demand. Thus they can continue to charge high price and earn higher profits. The optimal price of the book would be the one that covers all the cost of production and gives maximum profits. The optimum price where total revenue is maximum i.e. $9
c. If students decide to charge optimum price, then they should not continue this venture because they have decided to produce 6000 books but at $9 quantity of 9500 should be produced to earn maximum revenue and cover all the cost.
d. The store manager advised them to sell at $8.75 because that might be the average price at which books are selling in the store. He advised to reduce price to increase the demand.
Perfect competition is the market structure where there are many sellers and buyers, sellers sell a homogeneous good, buyers and sellers have all relevant information, entry into and exit from the market are easy. Monopolistic competition is the market structure where many producers sell products that are differentiated from one another.
Monopolistic competition differs from the perfect competition. These are the differences:-
1) Monopolistic firms have some market power while perfectly competitive firms have not the market power.
2) Product that is produced by monopolistic firms is not identical while perfectly firms produce homogeneous good.
3) Non-price competition exists in monopolistic competition while prefect competition does not have it.