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 25% in Butterball whole turkeys. Currently 20,000 turkeys are sold per week at an average price of $40.00 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 + 0.30 and weekly sales of chicken are 40,000 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

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

weekly quantity * price = 20000*$40 = $800,000

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

% change in quantity = % change in price * own price elasticity

= -25% * -1.8 = 45%

New quantity would be 20000 * 1.45 = 29000

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

weekly quantity * price = 29000*$30 = $870,000

d. What would you recommend? 2 points

Yes, since the net impact on revenue is positive

e. If cross price elasticity between turkey and chicken is + 0.30 and weekly sales of chicken are 40,000 pounds. What would be the impact of the new turkey price on weekly quantity sales of chicken (quantity of chicken pounds sold)

% change in quantity = % change in price * cross price elasticity

= -25% * 0.30 = -7.5%

new quantity of chicken = 40000 * (1-7.5%) = 37000