1 Pricing Decision

Suppose that you and your team are managers of a software company. The company is discussing the price of its new version of software for managing stores in a small state. Since the product is software, you may assume for this question that its marginal cost is zero (the cost associated with selling an extra unit is negligible). The fixed cost of this company is $500,000.

To choose the price of the new product, the owner and CEO of the company decide to hire a consulting company to forecast the sales of the product based on different scenarios and prices. The consulting company forecasts how many units will be sold for three price scenarios, as shown in the table below:

Price	#units sold (forecast)
700	800
500	1200
300	1600

Assuming that the consulting company's forecasts are correct (and can be extrapolated to a finer grid of prices), find what should be the price that your company should charge for the software. For this, do the following:

1. Copy the table above into a spreadsheet in Excel.
2. Generate a line between the lines with prices 700 and 500 and take the middle point of all values in each column. That is, the point is to obtain the line in blue below:

Price	Quantity Demanded (Thousands)
700	800
600	1000
500	1200

1. Generate a line between 500 and 300 and do the same. Now, there should be a table with prices 300, 400, 500, 600 and 700. (The point is such that one is just extrapolating values from the original table, such that one has more price points. This method of extrapolation is not necessarily the best that can be done, but it works very well for this linear case.)
2. Repeat the procedure of generating/creating new lines in between the ones already generated/created, so that there is now all prices from 300 to 700, in steps of 50s.
3. Now generate/create two new columns: one for revenue and another for profits (using the data given above).
4. By looking at the values obtained in the spreadsheet, what is the price that maximizes revenue and what is the price that maximizes profits?
5. Are these two prices equal or different? Explain why?
6. Then, it is stated to draw graphs of the revenue and profits obtained above putting on the horizontal line thequantity soldand on the vertical linerevenue/profits.
7. The next step is to redo what is outlined in items 5-7 above for the following situation: now, when selling a license for its new product, the software company incurs a cost of $50 to pay for a technician to install the software for the client, give a short demonstration of its use and answer any client questions. Therefore, the marginal cost of each unit sold is now $50.

Deliverables:

a. Provide the values necessary to Upload a spreadsheet in Excel with the final result of the above procedures, with the highest revenue and profit highlighted with color. (Make sure to include separate calculations for the initial case with zero marginal costs and the one described in item 9 above, with $50 marginal cost.)

b. How would you respond to question 7 for the case of zero marginal costs.

c. How would you respond to question 7 for the case of $50 marginal costs.