Honest Sam's Auto's
Sam's Auto's faces a strategic managerial decision. The firm can sell cars by simply posting a price. If the customer is willing to buy, clerks fill-out paperwork and the sale is complete. Alternatively, it can hire commissioned sales reps to probe customers' willingness and ability to pay. (These reps are trained to ask customers where they live and work and often directly ask customers what they intend to spend).
Under the former strategy, the firm's MC is $2 (thousand) per unit (which is also the AVC). The latter strategy increases MC and AVC by $1 thousand per car (to $3) but FC is $5 per month regardless. Under this approach, each customer essentially pays their full reservation price (willingness to pay). With a demand curve of P = 12 - Q, which strategy should Honest Sam's use and why?
Honest Sam's Auto's
Sam's Auto's faces a strategic managerial decision. The firm can sell cars by simply posting a price. If the customer is willing to buy, clerks fill-out paperwork and the sale is complete. Alternatively, it can hire commissioned sales reps to probe customers' willingness and ability to pay. (These reps are trained to ask customers where they live and work and often directly ask customers what they intend to spend).
Under the former strategy, the firm's MC is $2 (thousand) per unit (which is also the AVC). The latter strategy increases MC and AVC by $1 thousand per car (to $3) but FC is $5 per month regardless. Under this approach, each customer essentially pays their full reservation price (willingness to pay). With a demand curve of P = 12 - Q, which strategy should Honest Sam's use and why?
