A company specializes in producing mini berry chocolate and management is trying to ascertain the best pricing policy that they should adopt to increase sales revenue. Demand is very elastic to price changes and research has established that, for every $30 increase in price, demand would be expected to fall by 2,000 units. If the company set the price at $1,470, only 2,000 units would be demanded. The cost of production is as follows: Material $84, labour $24, fixed overheads $12. All other costs are expected to remain constant.

Required:

(a) Establish the demand function (equation) for the mini berry chocolates. (4 marks)

(b) Equate the marginal cost and marginal revenue to determine the optimum price and quantity. (6 marks)

(c) Explain briefly the concept of price elasticity of demand and discuss briefly how it impacts pricing decisions. (3 marks)