Question

You have to decide whether to sell widgets for $5 or $6 when your marginal cost is $3. In the past, you have had 15% success making the sale at the $5 price and only 10% success at the $6 price:

a. Sell for $5
b. Sell for $6
c. Insufficient information to decide

Answer 1

Both selling the widget at $5 with a 15% success rate and at $6 with a 10% success rate yield the same profit of $30 (without considering additional factors), because the lower price has a higher success rate and the higher price has a higher margin per sale. Further information might clarify which option is more beneficial in the long run.

Step-by-step explanation:

The question revolves around making a decision on pricing strategy based on potential success rates and marginal costs. When the widgets are sold at $5, the success rate of making a sale is 15%, but when the price increases to $6, the success rate drops to 10%. Given a marginal cost of $3 per widget, it is crucial to calculate which price point yields a higher profit.

If you sell the widgets for $5, for every 100 widgets, 15 will be sold, bringing in $75 in revenue with a marginal cost of $45 ($3 per widget), leading to a profit of $30. On the other hand, selling the widgets for $6 with a 10% success rate results in 10 widgets being sold, garnering an income of $60, with a marginal cost of $30, thus also resulting in a profit of $30. Therefore, without additional information such as fixed costs or the number of widgets you can sell, both price points provide the same profit. However, selling more at a lower cost could imply additional advantages, such as higher volume leading to economies of scale or customer loyalty.