You work at Ford Motor Company and you're put in charge of developing their newest electric vehicle. It's one of a kind, no other company has a competing model ready to launch. The project is struggling though, and your job is to fix any issues.

Ford's research team estimates that the demand for Ford's new electric vehicle is Q = 8,000 - 0.2P. Ford's accounting department provides you with estimates for marginal cost: $20,000 per vehicle.

a.How should you set the price of Ford's new vehicle to maximize profits?

Answer:

I should set the price by finding the MR function which can be done by taking the inverse demand's intercept and double the slope of the inverse demand function. Afterwards, take the MR function and equal them to the MC which is $20,000. Details below:

Inverse demand function: P = 40000-5Q

MR Function: 40000-10Q

MR=MC 40000-10Q = 20000

10Q = 20000

Q = 2000

After finding the Q, I would plug in to the demand function: 2000 = 8000-0.2P

P = $30,000 Profit-maximizing price (Is this correct?)

b. What is the own price elasticity of demand at the equilibrium price? Round your final answer ONLY to one decimal place.

Answer:

c.Provide a short explanation of how you found elasticity.

Answer: