The following is from the Washington Post, October 24, 1996: "For whom the Booth tolls, Price Really Does Matter" By Ste
Posted: Wed Apr 27, 2022 11:53 am
The following is from the Washington Post,
October 24, 1996:
"For whom the Booth tolls, Price Really Does
Matter"
By Steven Pearlstein
"All business faces a similar question: What price for
their product will generate the maximum profit? The answer is not
always obvious: Raising the price of something often has the
effect of reducing sales as price-sensitive consumers seek
alternatives or simply do without. For every product, the
extent of that sensitivity is different. The trick is to find
the point for each where the ideal tradeoff between profit margin
and sales volume is achieved. Right now, the developers of a new
private toll road between Leesburg and Washington-Dulles
International Airport are trying to discern the magic point.
The group originally projected that it could charge nearly $2 for
the 14-mile one-way trip, while attracting 34,000 trips on an
average day from overcrowded public roads such as nearby Rout
7. But after spending $350 million to build their much
heralded “Greenway”, they discovered to their dismay that only
about a third that number of commuters were willing to pay that
much to shave 20 minutes off their daily commute…It was only when
the company, in desperation, lowered the toll to $1 that it came
quite close to attracting the expected traffic flows."
Please answer the following questions.
a. Based on
the data given in the article above, write down (a linear
approximation of) the (daily) demand curve that the firm faces.
b. Assuming
that marginal cost is nearly zero, what is the price that maximizes
the firm’s daily profit? (Hint: use the demand curve
you estimated in part (a) above).
c. Can you
suggest a more profitable pricing strategy for the firm (there is
no need for any calculations here, just give the general idea)?
October 24, 1996:
"For whom the Booth tolls, Price Really Does
Matter"
By Steven Pearlstein
"All business faces a similar question: What price for
their product will generate the maximum profit? The answer is not
always obvious: Raising the price of something often has the
effect of reducing sales as price-sensitive consumers seek
alternatives or simply do without. For every product, the
extent of that sensitivity is different. The trick is to find
the point for each where the ideal tradeoff between profit margin
and sales volume is achieved. Right now, the developers of a new
private toll road between Leesburg and Washington-Dulles
International Airport are trying to discern the magic point.
The group originally projected that it could charge nearly $2 for
the 14-mile one-way trip, while attracting 34,000 trips on an
average day from overcrowded public roads such as nearby Rout
7. But after spending $350 million to build their much
heralded “Greenway”, they discovered to their dismay that only
about a third that number of commuters were willing to pay that
much to shave 20 minutes off their daily commute…It was only when
the company, in desperation, lowered the toll to $1 that it came
quite close to attracting the expected traffic flows."
Please answer the following questions.
a. Based on
the data given in the article above, write down (a linear
approximation of) the (daily) demand curve that the firm faces.
b. Assuming
that marginal cost is nearly zero, what is the price that maximizes
the firm’s daily profit? (Hint: use the demand curve
you estimated in part (a) above).
c. Can you
suggest a more profitable pricing strategy for the firm (there is
no need for any calculations here, just give the general idea)?