Managerial Economics: Applications, Strategy and Tactics 12th Edition by James McGuigan, Charles Moyer, Frederick Harris

Exercise 8

The Pear Computer Company just developed a totally revolutionary new personal computer. It estimates that it will take competitors at least two years to produce equivalent products. The demand function for the computer is estimated to be
P = 2,500 0.0005Q
The marginal (and average variable) cost of producing the computer is $900.
a. Compute the profit-maximizing price and output levels assuming Pear acts as a monopolist for its product.
b. Determine the total contribution to profits and fixed costs from the solution generated in Part (a). Pear Computer is considering an alternative pricing strategy of price skimming. It plans to set the following schedule of prices over the coming two years:
c. Calculate the contribution to profit and overhead for each of the 10 time periods and prices.
d. Compare your results in Part (c) with your answers in Part (b).
e. Explain the major advantages and disadvantages of price skimming as a pricing strategy.