Question 1: Just A Year After You Launched The Expansion Of

Question 1just A Year After You Launched The Expansion Of Dwj Inflati

Question 1: Just a year after you launched the expansion of DWJ, inflation has raised your marginal cost by 7% from $198.33 to $212.21. Your elasticity varies for each of the three regions in which you sell your DWJ brand. In the southwestern region, your elasticity is -2.76. In your upper-western region, the elasticity is -3.50. In the New England region, the elasticity is -5.76. Use the percentage change in quantity demanded formula (%ΔQd/%ΔP = e) to estimate the percentage decrease in quantity demanded if you were to raise prices in all three regions by 7%. (Do not include the negative sign when recording your answer. Round to one decimal place, i.e., 10.075 becomes 10.1).

a. %ΔQd Southwestern

b. %ΔQd Upper-western

c. %ΔQd New England

Question 2: Your current prices are $311 in the southwestern region; $278 in the western region; and $240 in the New England region. Your marginal cost is now $212.21. Given the predicted changes in the quantity demanded by region from problem 1 and using the stay-even analysis (%ΔQd = %ΔP / [%ΔP + ((P - MC)/P)]), determine if you can raise the price by 7% in any of the regional markets. Support your conclusion with detailed calculations, showing each step. Round your final answer to one decimal place.

Paper For Above instruction

The economic concept of price elasticity of demand is key to understanding how price changes impact quantity demanded across different regions. When a firm considers raising prices, especially after an increase in marginal costs due to inflation, it is crucial to analyze how sensitive consumers are to price changes in each regional market. This analysis involves estimating the percentage decrease in demand resulting from a 7% price increase, using the formula %ΔQd / %ΔP = e, where e is the price elasticity of demand.

Estimation of Percentage Decrease in Demand in Each Region

Given the elasticity values, calculating the demand response involves applying the formula directly. The Southwestern region has an elasticity of -2.76, with a 7% price hike, the demand decrease percentage is 2.76 times 7%, which yields approximately 19.3%. Similarly, in the Upper-Western region, with an elasticity of -3.50, demand will decrease by roughly 24.5%. For New England, with an elasticity of -5.76, the decrease amounts to about 40.3%. These figures suggest that demand declines more sharply in the New England region due to higher elasticity magnitude.

Implications for Pricing Strategy

However, whether a firm can raise prices profitably depends not only on the elasticity-driven demand decrease but also on the relationship between price, marginal cost, and anticipated revenue. The stay-even analysis formula helps determine if a price increase will sustain or improve profit margins, considering demand sensitivity.

Using current prices, the firm must assess if the new price exceeds the break-even point, calculated via the formula \( \%ΔQd = \%ΔP / (\%ΔP + ((P - MC)/P)) \). When applying the formula, it is evident that in the southwestern region, raising prices by 7% might be feasible since the demand decrease does not overshadow the gain from a higher price relative to marginal cost. Conversely, in the New England region, the high sensitivity implies that demand will drop significantly, possibly eroding profit margins.

Calculations Supporting the Pricing Decision

For the Southwestern region, with P = $311 and MC = $212.21, the ratio of marginal cost to price is approximately 0.682. Adding this to 1 gives 1.682; then, a 7% price increase (0.07) divided by 1.682 results in an estimated demand decrease of about 4.2%. This lower demand decrease suggests that incremental price increases could still be profitable.

In contrast, for New England, with P = $240 and MC = $212.21, the ratio is about 0.884; the total is 1.884. Dividing 0.07 by 1.884 gives a demand decrease estimate of approximately 3.7%. Although this appears manageable, the high elasticity implies overall revenue could decline unless the firm can offset the demand loss through increased prices.

Strategic Recommendations

Given these analyses, the firm can consider raising prices in the southwestern and possibly western regions but should proceed cautiously in New England due to higher elasticity and demand sensitivity. The decision should also factor in competitive dynamics, consumer behavior, and long-term market positioning.

Conclusion

Pricing strategies after inflation-induced cost increases require nuanced understanding of regional demand elasticities and cost structures. While small price hikes may be beneficial in some regions, exaggerated increases risk demand suppression and revenue loss. The application of elasticity and stay-even analyses enables informed decision-making to optimize profitability across diverse markets.

References

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