Question

A retailer is considering increasing the price of one of her products. She currently sells 80 units per week of this product at $30.00 apiece, and her variable costs for the product are $13.50. A market research study has indicated that, for this product, consumers will show a price elasticity of –1.8 to price changes that they perceive. For price changes that are too small for the consumer to notice, their price elasticity will be 0. The study has indicated that only 50 percent of the retailer’s market is aware of the current price for this product. The other 50 percent knows only that the product’s current price is somewhere between $22 and $38.

(a) What is the breakeven sales level for a $5 price increase for this product?

(b) Use the price-change response information given in the problem to calculate whether or not this $5 price increase would be profitable for the retailer.

Answer 1

As 50 percent customers won’t react, so

(80 * 50/100) = 40 units

Therefore, 40 units can be sold at $35

Rest, 40 units will react to the change in price,

%change in quantity demanded / %change in its price = 1.8

Or,% change in quantity demanded / 16.7 = 1.8

=> %change in quantity demanded = 30%

Now, if price changes only (40-12) = 28 goods will be demanded

Calculation of sales =

Before increase (80 * 30) = 2400

After increase (35 * 68) = 2380

As a result, it isn't profitable.

Note: Break-even sales will be as same as sales as there is no fixed cost