Question

1. Laury’s Merchandising custom prints logos onto coffee mugs. The firm currently sells it most popular style for $10 and has a marginal cost (including a blank mug and the printing) of $6. Jess recently ran an experiment and determined her demand elasticity is -5.

• a. Should Laury raise or lower her price? Explain your answer.
• b. Are there any other elasticities she should consider as it she sets a new price?

Answer 1

Given:-

  Price = $10

Marginal Cost = $6

Demand elasticity = -5

a) Should Laury raise or lower the price?

Ans:- Laura should Lower the price.

Reason:- Since the price elasticity of demand is -5 (which is less than 1), this indicate that the demand is ELASTIC. In this situation, an increase in price of even 1% will result in fall in demand by more than 1%.So, it is advisable that price should be reduced and seller should charge low.

b) Are there any other elasticities that she should consider as it she sets a new price?

Ans:- Apart from demand elasticity , there are other elasticities that must be kept in mind while deciding the price of a product. these are stated below:-

• Income elasticity of demand:- Income elasticity is defined as how consumer will react when there is change in his income level. Income elasticity helps to know how the demand for certain good or service will fluctuate due to change in the income level of the consumer. This also helps the seller to know its impact on the sales.

Calculation:-

• Cross price elasticity:- Cross price elasticity of demand is defined as how the Quantity demanded of Product A will be affected when the prices of Product B changes. Both the products are related to each other. There are 2 types of goods in the market:-

1. Complementary Goods:- Complementary goods are those goods which are consumed in conjunction like :- bread and butter. There is negative relation between two complementary goods. When price of Product A increases, automatically the demand of Product B falls.
2. Substitute goods:- Substitute goods are those goods which can be used in place of one another..On the other hand in case of substitute goods, there is positive cross elasticity as when the price of one good rises, consumers have the option of consumption of the other good and hence the demand falls. For example:- in case of Coke and Pepsi.