Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 3

The American Baker's Association reports that annual sales of bakery goods last year rose 15 percent, driven by a 50 percent increase in the demand for bran muffins. Most of the increase was attributed to a report that diets rich in bran help prevent certain types of cancer. You are the manager of a bakery that produces and packages gourmet bran muffins, and you currently sell bran muffins in packages of three. However, as a result of this new report, a typical consumer's inverse demand for your bran muffins is now P = 8 - 1.5 Q. If your cost of producing bran muffins is C ( Q ) = 0.5 Q , determine the optimal number of bran muffins to sell in a single package and the optimal package price.