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

Answer 1

Yes the customer reaction was of a rational customer.[the consumer who makes his choices after considering all the other alternative goods (and services) and consideration all the factors(price,quality,quantity etc...) in the market is called rational consumer.]

That's the only reason that he left the candles as he found the price of the candle are $1.99 and not 99 cent.

The behaviour of the customer represents that the product has an elastic demand because as soon as he found that the prices are high he left 11 candles and bought just 1.This shows that the product (candles)are having an elastic demand in the market.

And as a rational customer he could have bought all 12 candles if the price would have been 99cent rather than$1.99This shows the elasticity of the commodity.

If the price of candles would be cut down to 99 cent from $1.99 ,then their would be more demand or the candles and as the demand increases the total revenue of the store will also increase ,and as a result the profit earning will also increase.

Accoriding to the LAW OF DEMAND, it states the inverse relationship between the quantity demanded and the price of the commodity.in other words,it can be said that as the price of a commodity increase the quantity demanded decreses and vise-a-versa.

In this case as the price increase the customer's demand decrease and as a result the total revenue also decrease and eventually will result in low profit earning .

Alternate condition, will arise if the price decreases the quantity demand of the commodity will increase and as the result the total revenue will increase and eventually the profit earning will also increase .

**But the profit earning rate will be less as the profit margin will be less when the price of the candle(commodity) decrease.