Suppose you are a product manager at Nike, a firm with market power, and are trying to make a decision that will maximize firm profits related to the new Nike Air

Linsanity shoe. Your marketing department estimates that if you increase the proposed price from $120/pair to $130/pair, that projected demand will go from 250,000 pair/month, to 240,000 pair/month.

a) Is this projected outcome consistent with the law of demand?

b) What is the price elasticity of demand associated with this pricing decision?

c) Should you increase the price?

d) Why? What is the effect on monthly revenue?

Related to the question above, assume your marketing department, through further research tells you that, associated with the shoe price increase they estimate that there is still a 60% probability that volume will drop to 240,000 pair/month. But, they estimate that there is a 35% probability that volume will drop to 235,000 pair/month and a 5% probability that volume will drop to 120,000 pair/month (based on the small chance that Reebok will release a similar themed shoe).

a) What is the elasticity of demand for these later two scenarios?

b) What is the expected value of this pricing decision?

c) Should you increase the price of the shoe?