Question

1. J.Crew sells sweaters, pants, and other clothes to college students, among other groups. Many like its clothing, but the company has had financial problems in the past few years. In the belief that these problems stemmed from simple merchandising issues - styles, colors, price - J.Crew started to reposition itself in 2007. While some current and potential customers urged the company to lower prices and thereby expand its appeal, in fact prices were raised on many products. For example, a sweater selling for $48 in 2006 sold for $88 at the end of 2007. J.Crew sold 100,000 sweaters in 2006 and 80,000 sweaters in 2007.T-77

a) Using the midpoint method, calculate the price elasticity of demand for sweater.

b) What is the total revenue for sweater sales in 2006 and 2007?

c) Did the change in price increase or decrease the total revenue of J.Crew from sweater sales? How could you have predicted this from your answer to part a), explain.

d) Calculate the price effect and the sales effect of the price change.

Answer 1

A

Price elasticity of demand = % change in demand / % change in price

Price elasticity of demand =((80000-100000)/(80000+100000)/2)/ ((88-48)/(88+48)/2)

Price elasticity of demand = -.38

B.

Total revenue in 2006 = 48*100000 = $4800000

Total revenue in 2007 = 88*80000 = $7040000

C.

Revenue increased due to change in price.

It was predicted, because the price elasticity of demand is inelastic in nature. It means that demand is less responsive the change in prices. As a result, increase in price, though decreased the quantity sold but in lesser amount. It caused revenue to increase.

D

Price effect = (88-48)*80000 = $3200000

Sales effect = 48*(80000-100000) = -$960000