Question 1 (8 credits):

In the late 90s' construction slumps and low differentiation have led to significant price competition and margin erosion in the elevator industry. Clear Water Bay, Inc. (CWB) is one of the firms selling elevators to contractors who install elevators for residential buildings. The current market conditions are as follows:

Although the real demand for elevators fluctuates each year, it is estimated that on average the total market demand for elevators from residential buildings is 11,000 units per year.

There are three segments in this market: Segment A accounts for about 60% of the total demand, Segment B accounts for about 15%, and Segment C accounts for about 25%.

Currently, there is fierce price competition in each segment with quite some firms (including CWB). All these competitors are not making much profit and could not reduce prices further in any case.

The current market price for one elevator in Segment A is $30,000. The price for one elevator in Segment B is $37,500, and the price for one elevator in Segment C is $40,000.

All existing elevators require contractors (Note that they are customers buying elevators from the elevator manufacturers) to build machine rooms in buildings. According to most contractors, "currently elevator prices are 50% of the overall costs (for contractors) while machine room costs are 25% of the overall costs (for contractors). The remaining 25% of the overall costs include other operating costs (which remain the same dollar amount even when prices change".

CWB has developed a new technology (protected by patents) to produce elevators that do not require machine rooms (other operating costs for contractors remain the same amount as before). That is, contractors who buy such new elevators do not have to build machine rooms. The unit cost for CWB to produce one such elevator is about

$40,000. Only consider the given information and data.

If you were CWB and you can only charge a uniform price for the new elevator when selling it to contractors, what price would you charge to maximize your profit and what are the corresponding demand and profits? Please explain.

Price:

Demand:

Profits:

Justification: