Question

Can someone solve these points for me?

Question 4 Answer all parts of this question. The postal service of Caicos, an island in the Caribbean, obtains a significant portion of its revenues from sale of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high-value Caicos stamps depicting a common theme. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a stamp agency service company in the United Kingdom. The souvenir sheets cost the postal service £1.5 each. Caicos has been selling these souvenir sheets for £16.00 each and ordinarily sells about 110,000 units. To test the market, the postal service recently priced a new souvenir sheet at £17.00 and sales dropped to 88,000 units. 1. Does the postal service of Caicos make more profit selling souvenir sheets for £16.00 or £17.00 each? (6 marks) 2. Estimate the price elasticity of demand for the souvenir sheets. (6 marks) 3. Estimate the profit-maximizing price for souvenir sheets. (6 marks) 4. If Imperial Printing increases the price it charges to the Caicos postal service for souvenir sheets to £3.00 each, how much should the Caicos postal service charge its customers for the souvenir sheets? Comment on your answer. (7 marks) (Total - 25 marks)

Answer 1

Answer-1:

Unit sales Sales Cost of goods sold Contribution margin f 16.00 £ 17.00 Price Price 110,000 88,000 | £ 1,760,000 £1,496,000 165,000 132,000 £ 1,595,000 £ 1,364,000

The postal service of Caicos make more profit selling souvenir sheets for £ 16.00

Answer-2:

Price elasticity of demand(E_d) = [ln (1 + % change in quantity sold)] / [ln (1 + % change in price)]

= [ln (1 + (- 0.20))] / [ln (1 + (0.0625))]

= [ln (0.80)] / [ln (1.0625)]

= -0.09691 / 0.02633

= -3.68

Answer-3:

Profit-maximizing price = (1 + Profit-maximizing markup on variable cost) × Variable cost per unit

Profit-maximizing markup on variable cost = -1 / (1 + E_d)

= -1 / (1 + (-3.68))

= -1 / -2.68 = 0.3731

Profit-maximizing price = (1 + 0.3731) × £ 1.50 = 1.3731 × £ 1.50 = £ 2.06