Question

I went to the 99 Cent store the other day and got really excited at some amazing bargains: The scented candles that normally sold for $5.99 at Target was at the 99 Cent Store. After grabbing about a dozen of them and stuffing them into my shopping basket, I realized they weren’t 99 cents! They were marked as $1.99. I was a little annoyed and not a little disappointed as I mumbled to myself, “the audacity of them to keep the name of the store as “99 Cent Store” and mark up items at $1.99! I put back all of the candles except for one. As I was driving home, I was a little amused at my behavior. Given what you learned about price elasticity of demand from your text book and knowing that the price elasticity of demand for a product will be greater (a) the larger the number of close substitutes, (b) the greater the share of budget an item takes, (c) the more the item is considered to be a luxury, and (d) the narrower the market is defined (for example, a specific brand name vs. an entire market), when I put back these candles, was I behaving as a rational consumer? If my behavior is representative of an average costumer at the 99 Cent Store, would cutting the price back down to 99 cent increase their total revenue? Would doing so increase their profit?

To get the full 3 point extra credit, your discussion must:

• Include an explanation of whether my behavior was “elastic” or “inelastic.”
• Include a clear explanation of the relevant factors that affected my elasticity at the 99 Cent Store.
• Address and explain if cutting the price back down to 99 Cent would increase their total revenue
• Address and explain if cutting the price back down to 99 Cent would increase their profit

% please write the answer by keyboard

Answer 1

Let the current price = 1.99. If it is changed to 0.99, change in price = 0.99 - 1.99 = -1 or % change in price = change in price / oribinal price = -1/1.99 = -0.5025 or -50.251%.

As a result of cutting down the price from $1.99 to $0.99, the increase in demand would be 12 - 1 = 11, i.e., 12/1-1 = 11 or 1100%.

Hence, the price elasticity of demand at price = $1.99 = % change in price 11 / (-.5025) = - 21.89, i.e., the demand is elastic.

When the demand is elastic, a percent decline in price increases demand more proportionately and hence revenue increases. In this case, if price declines by 50.251% and quantity increases by 1100%, then increase in revenue = 1100% - 50.25% = 1049.75%

Also, if the MC < 0.99, then profit also increases.