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A watch is sold at a profit of 20%. If both the cost price and the selling price of the watch are decreased by Rs 100, the profit would be 25%. Original cost price for the watch is 
  • a)
    Rs 450
  • b)
    Rs 500
  • c)
    Rs 550
  • d)
    Rs 600
  • e)
    None of these
Correct answer is option 'B'. Can you explain this answer?
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A watch is sold at a profit of 20%. If both the cost price and the sel...
Given:
Profit = 20%
If cost price and selling price both are decreased by Rs 100, then profit = 25%

To find: Original cost price

Let the original selling price be x.
Profit = 20%
Cost price = (100/120) * x = (5/6)*x
Selling price = cost price + profit
=> x = (5/6)*x + 0.2*x
=> x = (5/6)*x + (1/5)*x
=> x = (25/30)*x + (6/30)*x
=> x = (5/6)*x + (1/5)*x = (31/30)*x

Now, let's calculate the new cost price and selling price after decreasing both by Rs 100.
New selling price = x - 100
New cost price = (5/6)*x - 100
New profit = 25%
=> x - 100 = (5/4)*((5/6)*x - 100)
=> 4x - 400 = 25x/36 - 125
=> 11x/9 = 275
=> x = Rs 500

Therefore, the original cost price is (5/6)*x = (5/6)*500 = Rs 416.67 (approx) which is closest to option B (Rs 500).
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Marginal analysis is an important decision-making tool in the business world. Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs. In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output, i.e. the marginal cost of producing the unit, is known as marginal-cost pricing. In the marginal analysis of pricing decisions, if marginal revenue, the increase in revenue from the sale of an additional unit of output, is greater than marginal cost at some level of output, marginal profit is positive, and, therefore, a greater quantity should be produced. Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced. Accordingly, firms tend to use this analysis to increase their production until marginal revenue equals marginal cost, and then charge a price which is determined by the demand curve. For instance, businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price of $2.00, the firm selling the item might wish to lower the price to $1.10 - if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.Which of the following best describes the primary purpose of the author?

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