You have been hired as a business analyst by Big Daddy’s Quik-ee Mart. Big Daddy has collected demand data on 3 products that he sells: Gasoline, Milk and Little Mama’s Chocolate Cookies™. The data is presented in the tables on the next page. Currently all three of these products are priced at $3.50 per unit. Big Daddy would like you to use this data and your knowledge of the price elasticity of demand to make suggestions about pricing strategies that might increase revenues for the Quik-ee Mart.

You have been hired as a business analyst by Big Daddy’s Quik-ee Mart. Big Daddy has collected demand data on 3 products that he sells: Gasoline, Milk and Little Mama’s Chocolate Cookies™. The data is presented in the tables on the next page. Currently all three of these products are priced at $3.50 per unit. Big Daddy would like you to use this data and your knowledge of the price elasticity of demand to make suggestions about pricing strategies that might increase revenues for the Quik-ee Mart.

There is one problem. When Junior (Big Daddy’s son) collected the data, he forgot to label the columns in the spread sheet, so now there is no way to tell which data goes with which of the 3 goods.

Big Daddy is very well known in the local community, so performing well on this job will guarantee you many more consulting jobs in town. Even though there is an important piece of information missing you must still try to help Big Daddy.

Use the data to calculate the arc elasticity of demand for each product using each pair of prices and quantities. (That is, calculate the arc elasticity between $2.00 and $2.50, between $2.50 and $3.00, etc.).

Given what you know about the price elasticity of demand, can you now guess which set of data belongs to which product? Explain your reasoning.

Assuming that you are correct in your guesses, provide some sales and marketing advice to Big Daddy. What sort of pricing changes could Big Daddy implement to increase total revenue?

Format of your answers:

You should present your conclusions and suggestions to Big Daddy in the form of a memo. Remember when drafting the memo that Big Daddy is a busy business executive. Give him your suggestions, and explain your reasoning, succinctly and in as non-technical terms as possible. Attach an appendix that includes your completed data tables with the arc elasticities, along with a sample calculation showing how the elasticities were found. The appendix can also include any other background material you feel is relevant and include references to any external resources you may have consulted in preparing your report.

Extra Credit:

In addition to the price elasticity of demand, Chapter 3 discusses several other demand elasticities. Might any of these be relevant to this problem? Explain. If possible, suggest additional data that Junior could collect to add to this analysis and what findings you would expect (again, based on your knowledge of gasoline, milk and cookies).

Data for Good 1

Price Quantity Demanded Arc Elasticity
$2.00 280
$2.50 260 -0.3333
$3.00 240 -0.44
$3.50 220 -0.56521
$4.00 200 -0.7143
$4.50 180 -0.8947

Data for Good 2

Price Quantity Demanded Arc Elasticity
$2.00 230
$2.50 225 -0.0989
$3.00 220 -0.1236
$3.50 215 -0.1494
$4.00 210 -0.1765
$4.50 205 -0.2048

Data for Good 3

Price Quantity Demanded Arc Elasticity
$2.00 510
$2.50 413 -0.9458
$3.00 315 -1.4808
$3.50 218 -2.3659
$4.00 120 -4.3491
$4.50 23 -11.5315

*I was able to calculate all of the math (hopefully correct), but am having issues with the guesses; economics has always really stumped me and I seriously get confused about inelasticity and cpuld really use some help figuring that out. I’m also a little confused by what he means by memo, my professor is really vague most of the time.

 

answer:

Out of Gasoline, Milk and Chocolate cookies, the good with the most elastic demand is Chocolate Cookies. This is because it comes under the category of luxury goods against Milk, Gasoline which are a necessity goods. So, the data given shows that the demand elasticity for good 3 is highest. So, chocolate cookies represent good 3.

The good with the least elastic demand out of three is milk as there are no substitute of milk available in the market. It is a necessity good. So, the given data shows that good 2 is milk.

So, good 1 is gasoline. It cannot be computed to milk in terms of necessity and also not to chocolate cookies in terms of luxury good. So, the demand elasticity will lie between the two goods.

Also, in order to increase the total revenue of the good, the price of the good with inelastic demand should increase and the price of the good with relatively elastic demand should be decreased. Thus, total revenue can be increased by following this pricing strategy.

Extra data in terms of income elasticity and cross price elasticity can be added to this so that we can verify our results. Income elasticity will tell whether the good is a luxury or necessity good. The cross price elasticity of demand will tell whether the good has close substitutes available in the market or not. This will help in choosing a right pricing strategy for the good.

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