Question

How do I calculate this? Please include detailed step by step method to solve. The Springvale Seaside owners see the change in profits from the price decrease in May and the projection for June. They decide to go back to a price of $81.00 and have sales of 35,000 boxes in June. The May production required staff to work 2 weekends and there were many complaints. No one wanted to work weekends during vacation season in Maine and there was no room to expand production. The owners were willing to add a second location that would permit greater production if profits justified. They decide that they are only willing to manage enough production to support 35,000 deliveries at a price of $81.00. However, if they raised price to $90.00 per box for July, they would be willing to hire additional staff, lease more space across town and produce 58,000 boxes. A. Calculate the Elasticity of Supply. Is it elastic or inelastic? B How many deliveries will Seaside have at a price of $90.00? Hint: you can only sell what customers will buy. Use the original the elasticity of demand calculated in #1 below. #1 You manage The Springvale Seaside Caramel Company which makes a chocolate – caramel truffle for sale to gift shops from Cape Cod to Mount Desert Island near Bar Harbor Maine. The company sells individually wrapped candies in boxes of 50 for $81.00 each. The candies retail for $3.99 for an individual piece and sales have been strong. The owners of the Seaside would like to increase its sales and profits. They know that, if price is lowered, they will generate more sales. Sales are typically steady at 35,000 boxes per month from May through October. Last year they sold 35,000 boxes in May. So they run an experiment. Price is lowered to $73.00 per box in May of this year and the number of deliveries increases to 37,000. What is the Price Elasticity of Demand?

Answer 1

(#1)

Price elasticity of demand (Ed) = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(37,000 - 35,000) / (37,000 + 35,000) / 2] / [$(73 - 81) / $(73 + 81) / 2]

= [2,000 / (72,000 / 2)] / [- $8 / $(154 / 2)]

= (2,000 / 36,000) / (- 8 / 77)

= - 0.53

It means that if Price increases (decreases) by N%, quantity demanded decreases (increases) by 0.53%. Demand is inelastic.

(#2)

(A) Elasticity of supply (Es) = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(58,000 - 35,000) / (58,000 + 35,000) / 2] / [$(90 - 81) / $(90 + 81) / 2]

= [23,000 / (93,000 / 2)] / [$9 / $(171 / 2)]

= (23,000 / 46,500) / (9 / 85.5)

= 0.0006

Since Es < 1, supply is inelastic.

(B)

Increase in price = $(90 - 81) / $81 = $9 / $81 = 0.1111 = 11.11%

Therefore, Decrease in quantity demanded = 11.11% x 0.53 = 5.89%

Quantity demanded = 35,000 x (1 - 0.0589) = 35,000 x 0.9411 = 32,939

Since sellers can sell only the quantity demanded by buyers, Number of deliveries = 32,939