Final answer:
The optimal price for the appliance must be set to minimize losses or maximize profits, considering the balance between total costs and potential revenues. A price that covers variable costs and contributes positively to fixed costs is essential, reflecting the market's willingness to pay without causing operational losses that exceed those of a shutdown.
Step-by-step explanation:
Identifying the optimal price for an appliance, excluding revenue from related consumables, involves a nuanced analysis of economic principles. First, we must consider that setting a price entails balancing the total costs (explicit and implicit) against potential revenue to achieve a positive economic profit. According to the provided information, the economic profit calculation is as follows: Economic profit = total revenues - explicit costs - implicit costs = $200,000 - $85,000 - $125,000, resulting in a loss of -$10,000 per year.
In the given scenario, we also understand, through an agricultural example, that at a price of $2.00 per pack, a farm will make a loss of $47.45, which is preferable to the loss of all fixed costs amounting to $62.00; thus, staying operational is the loss-minimizing choice. However, if the price drops to $1.50 per pack, which is below the average variable cost, the farm would have to shut down as the losses would balloon to $75, exceeding the fixed costs of $62.0. From this, it is clear that pricing decisions should always consider the cost structure and the point where losses from continued operation exceed those of a shutdown.
Therefore, to find the optimal price for the appliance, one must look beyond just covering the costs and aim for a price point that maximizes profits or at the least minimizes losses, which will depend on the unique cost structure and market dynamics of the appliance in question. The optimal price will be one that covers variable costs and contributes to, or minimizes, fixed cost losses according to market willingness to pay.