Zonakha Limited specialises in the production of a range of healthy products. It is about to launch a new product, the 'Healthy Energy Bar', a unique green bar which is capable of providing unprecedented levels of energy from the seaweed used. The company's development costs have been high and it is expected that the product will only have a five-year life cycle.

Zonakha Limited is now trying to ascertain the best pricing policy that they should adopt for the Energy Bar's launch onto the market. Demand is very responsive to price changes and research has established that, for every R5,60 increase in price, demand would be expected to fall by 70,000 units. If the company set the price at R72,60, only 280,000 units per week would be demanded.

The costs of producing each energy bar is R13,00:

Required:

(a) Determine the optimum price and quantity at which the company profits would be maximized. (6 marks)

(b) Describe the limitations of using the model in (a) above. (2 marks)

Formulae:

Demand curve P = a - bQ a = price when Q = 0 MR = a - 2bQ

b = change in price

change in quantity