Question

Suppose you are the marketing analyst for Albertsons in Texas. You are requested to estimate the effect on weekly gross revenues of a promotion involving a retail price cut of 10% in Butterball whole turkeys. Currently 10,000 turkeys are sold per week at an average price of $25.00 per turkey. You found out that turkey demand has an own price elasticity of –1.80 Your supervisor is waiting for your analysis.

a. What is the current weekly total revenue (before the price change) from whole turkeys? 3 points

b. What is the projected increased (quantity) in turkeys sold? (after the price cut) Hint: use the definition of own price elasticity! 5 points

c. .What is the projected weekly total revenue (after price change)? 4 points.

d. What would you recommend? 2 points

e. If cross price elasticity between turkey and chicken is + 0.40 and weekly sales of chicken are 30,000 pounds. What would be the impact of the new turkey price on weekly quantity sales of chicken (quantity of chicken pounds sold) (4 points)
Hint; use the concept of cross-price elasticity).

Answer 1

Total turkeys sold = 10,000 at a price of $2.5

Own price elasticity of turkey is -1.80

a) Total revenue generated before price change = Price * Quantity = 2.5 * 10,000 = 25,000

b) %change in price = -10%

Elasticity of demand = %change in quantity demanded / %change in price

-1.8 = [%change in quantity demanded / (-10%)]

%change in quantity demanded = 18%

Quantity demanded after price change will rise by 18%

c) New price would be 2.5 * 0.9 = 2.25

New quantity demanded would be 10,000 * 1.18 = 11,800

New revenue generated = 2.25 * 11,800 = 26,550

d) As demand is elastic, I would recommend to reduce price to raise revenue further.

e) Cross price elasticity between turkey and chicken = 0.4

Sales of chicken = 30,000 pounds

Cross price elasticity of demand = %change in quantity demanded of chicken / %change in price of turkey

%change in price of turkey = -10%

%change in quantity demanded of chicken = 0.4 * (-10%) = -4%

Quantity demanded of chicken will fall by 4% which means new quantity demanded of chicken is 30,000 * 0.96 = 28,800