Managers at the Ridgeway Corporation produce a medical device that they sell in Japan, Europe, and the United States. Transportation costs are a negligible proportion of the product's total costs. The price elasticity of demand for the product is - 4.0 in Japan, - 2.0 in the United States, and - 1.33 in Europe. Because of legal limitations, this medical device, once sold to a customer in one country, cannot be resold to a buyer in another country.
a. The firm's vice president for marketing circulates a memo recommending that the price of the device be $1,000 in Japan, $2,000 in the United States, and $3,000 in Europe. Comment on his recommendations.
b. His recommendations are accepted. Sales managers send reports to corporate headquarters saying that the quantity of the devices being sold in the United States is lower than expected. Comment on their reports.
c. After considerable argument, the U.S. sales manager agrees to lower the price in the United States to $1,500. Is this a wise decision? Why or why not?
d. Can you be sure that managers are maximizing profit? Why or why not?