A television station is considering the sale of promotional DVDs.

It can have the DVDs

produced by one of two suppliers. Supplier A will charge the station a set-up fee of $1200
plus $2 for each DVD; supplier B has no set-up fee and will charge $4 per DVD. The station
estimates its demand for the DVDs to be given by Q = 1,600 - 200P, where P is the price in
dollars and Q is the number of DVDs. The price equation is P = 8 -Q/200.

A. Suppose the station plans to give away the videos. How many DVDs should it order?
From which supplier?

First we find the order quantity Q when the cost of the suppliers is equal
Cost of Supplier A = Cost of Supplier B
1,200 + 2Q = 0 + 4Q
2Q = 1,200
Q = 600
Hence, at Q=600, both supplier costs are equal. If Q < 600, choose Supplier
B and if Q > 600, choose Suppler A.
Since the station is planning to give away videos, it implies P=0.
Hence Q = 1600- 200*0=1600. That is it should order 1600 DVDs.
If it orders 1600 DVDs from supplier A, the cost is =1200 + 3200 =$4400.
If it orders from B, the cost is = $6400.
Hence it should order from Supplier A since it is cheaper.

B. Suppose instead that the station seeks to maximize its profit from sales of DVDS. What
price should be charged? How many DVD should it order from which supplier?

Given P = 8 Q/200 and Q=1,600 - 200P,

Revenue = Q*P= 8Q Q2/200
If inverse demand function is P = a - bQ, the marginal revenue function has the form
MR = a - 2bQ.
Hence, MR = 8 Q/100
Also, MCA = 2 and MCB = 4 are marginal costs for supplier A and B respectively.
For MCA = 2: Setting MC=MR,

8 Q*/100 = 2
Q*/100 = 6
Q* = 600
Hence, P* = 8 (1/200)*600 = 8 3
P* = 5
For supplier A, Q* = 600, P*= 5
RevenueA = (P*)(Q*) (1200 + 2Q*)
= (5)(600) (1200 + 2x600)
= 3,000 2,400
= $600
Similarly, For MCB = 4: Setting MR=MC
8 Q*/100 = 4
Q*/100 = 4
Q* = 400
P* = 8 (1/200)*400 = 8 2
P* = 6
For Supplier B: Q* = 400, P* = 6
RevenueB = (P*)(Q*) (4Q*)
= (6)(400) (4x400)
= 2,400 1,600
= $800

Hence, the price that should be charged per cassette is $6.

The station should order 400 DVDs from supplier B.