1. The document discusses pricing complementary products like suits, ties, and shirts. It currently costs $350 for a suit and they sell 300 suits. Ties cost $20 each and shirts cost $15 each.
2. It notes that with the current pricing model, the demand for ties and shirts is not separate from suits. This is because the model allows the prices of ties and shirts to increase indefinitely, which means there would be no demand at a high enough price.
3. In order to properly model the demand relationship between complementary products, there needs to be an upper limit on the prices allowed for ties and shirts.
Original Description:
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1. The document discusses pricing complementary products like suits, ties, and shirts. It currently costs $350 for a suit and they sell 300 suits. Ties cost $20 each and shirts cost $15 each.
2. It notes that with the current pricing model, the demand for ties and shirts is not separate from suits. This is because the model allows the prices of ties and shirts to increase indefinitely, which means there would be no demand at a high enough price.
3. In order to properly model the demand relationship between complementary products, there needs to be an upper limit on the prices allowed for ties and shirts.
1. The document discusses pricing complementary products like suits, ties, and shirts. It currently costs $350 for a suit and they sell 300 suits. Ties cost $20 each and shirts cost $15 each.
2. It notes that with the current pricing model, the demand for ties and shirts is not separate from suits. This is because the model allows the prices of ties and shirts to increase indefinitely, which means there would be no demand at a high enough price.
3. In order to properly model the demand relationship between complementary products, there needs to be an upper limit on the prices allowed for ties and shirts.
2 3 Suits Complementary products 4 Current price $350 Ties Shirts 5 Current demand 300 Units sold per suit 1.5 2 Part a: a: This Thisisisaa beautiful beautiful model. model. (Look (Look at at its its formulas.) formulas.) However, However, Solver Solver tells tellsus usitit Part 6 Unit cost suits $320 Unit cost ties shirts $20 $15 doesn't converge, doesn't converge,as as indicated indicated byby the thehuge hugevalues valuesin in the the###### columns. columns. TheThereason reason isis 7 thatthere that thereisisno no upper upper limit limitononthe the price priceof of ties tiesand and shirts. shirts.Therefore, Therefore, the the model model allowsthese allows theseprices pricesto to increase increaseindefinitely. indefinitely. The Theeffect effect isisthat thatthere thereisis no no separate separate 8 Demand function Constant Elasticity demand for for ties ties and andshirts shirts(because (becausethetheprices prices arearesoso high), high),but butfor for any any reasonable reasonable demand 9 Constant 687,529,545 Demand function 75460 288500 price of price of suits, suits, plenty plenty of ofties tiesand and shirts shirtswill will be be sold sold for for astronomical astronomical prices. prices. 10 Elasticity -2.5 -1.6 -1.7 To get To get aareasonable reasonable model, model, you you have have to to put put some some upper upper bound boundon on the theprices pricesof ofthe the 11 ties and ties andshirts. shirts. Or Or you youcould could do do what whatisis suggested suggested in in part partb.b. 12 Suit sales Tie, shirt sales (separate from sales of suits) 13 Price of suits $320.00 Prices of ties, shirts ### ### Part b: Part b: You Youcould couldimpose imposesomesomesort sortofofsliding slidingscale. scale.For Forshirts, shirts,say, say,you youmight might 14 Demand 375.3 Demand 0.0 0.0 assumethat assume thatwhen when the theprice price of of shirts shirts isisno no greater greater than than $25, $25,customers customers will will buy buy 22 shirtson shirts on average average per per suit. suit. When When thetheprice price isisbetween between$25 $25 and and $35, $35, customers customerswillwill 15 Profit from suits only $0 Profit $0 $0 buy only buy only 11 shirt shirton on average averageperpersuit. suit. And And whenwhen the theprice priceisisover over$35, $35, customers customers 16 Profit from shirts and ties ### won't buy won't buy any any shirts shirts with with suits. suits. This Thiswouldn't wouldn'tbe be too too difficult difficult to to model, model, and and ititwould would 17 result in result in aabounded bounded solution, solution, because becausethere therewould would nono longer longer bebe an anincentive incentive toto price shirts price shirtsandand ties ties so so high. high. 18 Total profit ### 19 20 21 22 23 24