Question

Dave’s Delicious Muffins are sold in California and Oregon. They recently conducted a market research test and discovered that the price elasticity of demand for their muffins is .8 in Oregon and 1.7 in California. Currently, muffins are sold for $3 apiece in both locations. They are looking for advice on their pricing strategy.

Q 37

Should they increase their price in Oregon?

Select one:

a. no

b. we need more information to determine

c. yes

Question 38

Should they increase their price in CA?

Select one:

a. we need more information to determine

b. yes

c. no

Question 39

What do the relative elasticities suggest about relative pricing in both states?

Select one:

a. they should price muffins higher in California

b. they should price muffins higher in Oregon

c. we need more information to determine

Question 40

What does the data suggest about substitutes in the respective markets?

Select one:

a. there are more substitute products in California

b. there are more substitute products in Oregon

Answer 1

37.

Oregon' price elasticity of demand is relatively inelastic. That means that the change in demand is relatievely less than the price. Pe = 0.8 which is Pe < 1.

Any change in price would not lead to any big change in demand. Therefore, Oregon prices can increased a little in order to gain more profits.

Ans. c. Yes

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38.

California's price elasticity of demand is relatively elastic. It means that even small changes in price would lead to huge change in demand of the Dave's muffins. Pe = 1.7 which is Pe > 1.

The change in quantity demanded will be proportionately higher than the price change. So, an increase in price would lead to more decrease in demand. Thua, Dave muffins would lose the market in California.

Ans. c. No

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39.

Oregon's price elasticity of demand relative to California: Ped O/Ped CA = 0.8/1.7 = 0.47

This means that demand in Oregon will be relatively less responsive to the prices suggesting that prices in Oregon could be increased more than in California.

Similarily, California's price elasticity of demand relative to Oregon : Ped CA/Ped O = 1.7/0.8 = 2.125

The demand of muffins will be highly responsive in California as relative to Oregon. Suggesting that increasing prices in CA would lead to losing market shares of Dave's Muffins.

Ans. b. they should price muffins higher in Oregon.

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40.

The price elasticity of California tells that the market is more sensitive to price changes. It could suggest that there is existence of many close substitutes in the market.

Ans. a. there are more substitute products in California.  

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