Question

Q1000 150 IP Price, $ 6.00 5.75 5.50 5.25 5.00 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 uantityElasticitv 100.0 137.5 175.0 212.5 250.0 287.5 325.0 362.5 400.0 437.5 475.0 512.5 550.0 -9.00 -6.27 4.71 3.71 -3.00 -2.48 -2.08 1.76 1.29 -0.95 c) At which prices is demand elastic, inelastic, and unit elastic? Enter your answers using cell references to the table above. Price From Price To Elastic Inelastic The demand is unit elastic at some price between an d) Are there prices between $3 and $6 which you are certain the company should not charge based on the elasticities you observe? Assume your ice cream must be priced in $.25 increments The company should not charge below e) If the goal of this firm was to maximize revenue, what price would you recommend they charge for a pint of ice cream? Use functions and Excel's Solver functionality Price (P)- Quantity (Q Revenue-

Answer 1

Q = 1000 - 150P

(c). Demand is said to be inelastic if the absolute value of elasticity is less than one. At one, the demand is unit elastic, while the demand is said to be elastic when the absolute value is greater than one.

We see that at $3.00, the elasticity is 0.95, while at $3.25, the elasticity is 1.11. Thus, the demand becomes unit elastic at some price between these two values.

The demand is inelastic for prices between $0 to $3.
The demand is elastic for prices greater than $3.25.

(d). The elasticity helps us determine how much we can increase prices without resulting in a significant drop in consumers. At $3.25, we see that a 10% price increase will result in loss of 11.1% consumers.
At $5.75, we see that a 10% price increase will result in loss of 90% consumers. ---> this cannot be allowed

So, we assume that with a 10% price increase, we want to retain 80% of our consumers. Thus, our safe range is at $4.25, and we shouldn't price our ice-cream lower than that.

(e). Based on revenue, let us look at the table again:

Price	Quantity	Revenue
6.00	100.0	600.0
5.75	137.5	790.625
5.50	175.0	962.5
5.25	212.5	1115.625
5.00	250.0	1250
4.75	287.5	1365.625
4.50	325.0	1462.5
4.25	362.5	1540.625
4.00	400.0	1600
3.75	437.5	1640.625
3.50	475.0	1662.5
3.25	512.5	1665.625
3.00	550.0	1650

If we want to maximise our revenue, the ice-cream should be priced at $3.25 and the quantity will be 512.5, resulting in a revenue of $1665.625.

Hope this helped!