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You are the owner of a local Honda
dealership. Unlike other dealerships in the area, you take pride in your “No
Haggle” sales policy. Last year, your dealership earned record profits of $1.4
million. In your market, you compete against two other dealers, and the
market-level price elasticity of demand for midsized Honda automobiles is -1.6.
In each of the last five years, your dealership has sold more midsized automobiles
than any other Honda dealership in the nation. This entitled your dealership to
an additional 40 percent off the manufacturer’s suggested retail price (MSRP)
in each year. Taking this into account, your marginal cost of a midsized
automobile is $13,000.
What price should you charge for a midsized automobile if you expect to
maintain your record sales?
