Answer to Question #163540 in Economics for M

Question

Lisa sells cherries on the market. On her first day, she charges £4 per punnet and sold 20 punnets. On her second day, she charged £3 per punnets and sold 60. On her third day, she charged £2 and sold 100 and when she charged £1 she sold 140 punnets. She thinks there is a relationship between price and quantity sold and asked you for your help. She told you that she buys the cherries for £0.65 and the stall cost her £60 a day. She also said that she would not mind charging £1.50 or £2.50 but she would not charge £1.75 or £2.25 as it is not practical.

a. Use a table to show the relationship between price and profit/loss
b. Draw a diagram to represent price and profit/loss
c. What is the optimal selling price?

Answer 1

a.

P = 4, TP = 4×20 - (0.65×20 + 60) = £7,

P = 3, TP = 3×60 - (0.65×60 + 60) = £81,

P = 2.5, TP = 2.5×80 - (0.65×80 + 60) = £88,

P = 2, TP = 2×100 - (0.65×100 + 60) = £75,

P = 1, TP = 1×140 - (0.65×140 + 60) = - £11.

b. As price decreases first profit rises, and then starts to decrease after P = £2.5.

c. The optimal selling price is £2.5, because at this price profit is maximized.