A distant cousin living in the state of Idaho has reached out to you seeking help with pricing for a company, SimpleWood, that he just started. The company seeks to build inexpensive furniture from local wood using local labor and sell it locally. He believes there is substantial demand in Idaho for what he calls "a dining room set": a table, six chairs, two armchairs, and a media table, and he can produce this set at a modest marginal cost of $600. Anticipating frequent skiing trips, you immediately agreed.

A classmate of yours specialized in marketing has quickly identified that the only significant competitor for this type of furniture is Ikea, with the closest store located in Draper, UT, just south of Salt Lake City. Traveling there is time-consuming and costly, as well as ordering online because of shipping costs. On the other hand, the Ikea prices can be readily observed online. The classmate's conclusion is that the yearly demand for the SimpleWood's dining room set is well described by a linear relation

Q_s = 4,400 - 5P_s + 2P_I

where P_s is SimpleWood's price, P_Iis Ikea's price for a comparable set, and Q_s is SimpleWood's quantity demanded, in units per year. Another classmate familiar with pricing by large chain stores tells you that Ikea takes into account its own costs, demand, and pricing by other large chains, but they do not monitor prices by small local competitors such as SimpleWood. Specifically, this implies that the current price for a similar dining set, which is $800, is likely to stay regardless of the price you recommend. Problem 4a) (5 points) What price would you recommend your cousin to charge for a dining room set? What is the quantity sold and what is the profit in this case?

Problem 4b) (5 points) The cousin has asked you to explore the opportunity to organize a showroom. A showroom, he believes, would increase sales by 1000 units every year, at any price. The cost to lease and maintain the showroom is $330,000. Do you think this is a good idea?

Problem 4c) (5 points) The success of SimpleWood has gotten national recognition and was featured in CBS's 60 Minutes. The same episode featured an Ikea representative who confirmed they are getting fewer customers from Idaho than before, which they partly attribute to local purchases. He confirmed that if this trend persists, Ikea would likely decrease the price of its own dining set. If this happens, would you recommend to increase the price of SimpleWood dining room set, decrease it, or keep the same?

Problem 4d) (5 points) The state of Idaho imposes a law that for every tree harvested within the state limits, a new tree must be planted. Would you recommend to increase the price of a SimpleWood dining set, decrease it, or keep it the same? If SimpleWood follows your recommendations, what will happen to their sales volume (units), compared to the situation as it was before the law was passed? What will happen to their profit? Problem 4e) (5 points) Before you had a chance to implement the change in (d), you realized that this law got significant attention from environmentalists, who praised this move and encouraged residents of Idaho to buy locally built furniture. You expect this positive PR will lead to more people willing to buy SimpleWood's furniture. Compared to the baseline scenario (in part (a)), would you recommend to adjust the price up, down, or not at all, or you cannot give any advice absent more information?

Problem 4f) (5 points) Pressure from environmental activists has led Ikea to buy responsibly sourced wood as well. Fortunately, this has happened after you signed long-term contracts with local timber suppliers, so your costs are unaffected by Ikea's change. However, you are certain that Ikea's new wood sources are more expensive than the other sources Ikea had been using. Do you expect Ikea to increase its price? Should you reassess the price of SimpleWood now? (Assume that Ikea is unaware of your existence.)