Advertising and Wholesale Pricing

The Sweet Dreams Ltd. is the sole producer of chimney cake filled with ice-cream.

The demand function of this product is the following:

= (1 /5 ) ,

where N denotes the potential number of consumers, P denotes price, and A denotes the advertising expenditure. Based on market research Sweet Dreams assumes that N=1000. The unit variable cost of the ice-cream filled chimney cake is 200. Besides chimney cake filled with ice-cream Sweet Dreams Ltd. produces special hand-made bon-bons. There is only one pastry shop which buys these bon-bons from Sweet Dreams.

The market demand of these bon-bons is the following:

= 5000 20,

where P is the consumer price offered by the pastry shop. The unit variable cost of manufacturing the bon-bons is 150 HUF. As a marketing manager, your task is to determine the wholsale price that Sweet Dreams offers to the pastry shop. The pastry shop will determine the consumer price after observing the wholsale price offered by Sweet Dreams. For simplicity you assume that the pastry shop does not have any costs while selling these bon-bons.

1. What will be the profit-maximizing level of advertising and pricing regarding the chimney cake? (7 points)

2. How much profit does the firm make from the sale of chimney cake? (3 points)

3. What will be the wholesale price and consumer price of bon-bons? (6 points)

4. How much will be the profits of Sweet Dreams and the pastry shop regarding the bon-bons? (4 points)