Optimization models
Demand function
What shall we do with our selling Price, if: P1 = $1,000, then Q1 = 400 units, and R1 = $400,000 P2 = $1,750, then Q2 = 250 units, and R2 = $437,500 To do: (a) increase the price, or (b) decrease the price, or (c) keep the price at $1,750? SOLUTION: The price that MAX the revenue shall be: $2,250, $2,000, $1,750, $1,500, $1,250? Demand function
Correct answer: The “best” price to MAX the revenue would be: $1,500 Popt = $1,500, then Qopt = 300 units, and RMAX = $450,000 To do: (a) increase the price (b) decrease the price (c) keep the price at $1,750 This can be solved through (1) finding the demand function equation, and (2) solving a revenue maximization problem.