The Teenager Company Makes And Sells Skateboards At An Avera

The Teenager Company Makes And Sells Skateboards At An Average Price O

The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 skateboards. The company believes that the price elasticity for this product is about -2.5. Which of the following would be the best option for the company? (Question is based on Chapter 4 question 6.)

Refer to the situation described in question 10. What was total revenue for the past year, in dollars? (Enter as a whole number without the dollar sign.)

Refer to the situation described in question 10. Given the price elasticity of -2.5, and the proposed price of $63, what should be the quantity supplied? (Round to the nearest whole number.)

Refer to the situation described in question 10. What would total annual revenue be at the proposed price of $63? (Enter as a whole number without the dollar sign.)

If the company’s belief is correct, would total revenue increase, decrease, or remain the same as a result of the $63 price cut? Increase Decrease Remain the same.

Questions 15 through 17 refer to the following scenario. A local supermarket lowers the price of its vanilla ice cream from $3.50 per half gallon to $3. Vanilla ice cream unit sales increase by 20 percent. The store manager notices that the unit sales of chocolate syrup increase by 10 percent. What is the price elasticity of vanilla ice cream? Round to the nearest tenth and drop the minus sign when submitting your answer.

Paper For Above instruction

Introduction

Understanding pricing strategies and elasticities is crucial for businesses aiming to optimize revenue and market share. The scenario involving The Teenager Company’s skateboard sales provides an excellent case for analyzing how price elasticity influences decision-making. This paper explores the company's options based on the provided data, calculates relevant revenues, and discusses the implications of elasticity on revenue outcomes. Additionally, insights are drawn from the supermarket ice cream scenario to illustrate broader applications of price elasticity concepts in different retail contexts.

Analyzing the Skateboard Business

The Teenager Company sells skateboards at an average price of $70, with a sold volume of 4,000 units annually. The price elasticity of demand is given as -2.5, indicating a highly elastic demand (since elasticity is greater than 1 in absolute value), meaning that consumers are quite responsive to price changes. When elasticity is negative, as in this case, it signifies that price and quantity demanded move in opposite directions.

According to economic theory, a demand elasticity of -2.5 suggests that a 1% change in price results in a 2.5% change in quantity demanded. Typically, in such cases, lowering the price encourages a proportionally larger increase in quantity sold, thereby potentially increasing total revenue. Conversely, raising the price might significantly decrease quantity demanded, leading to a reduction in total revenue.

Given the elasticity value, the optimal strategy is to lower the price, as this should result in increased total revenue due to the high responsiveness of demand. The best course of action for The Teenager Company is thus to lower the price and plan to increase the quantity supplied accordingly.

Calculating Total Revenue for the Past Year

Total revenue (TR) is calculated as the product of price (P) and quantity sold (Q). For the previous year:

TR = P × Q = $70 × 4,000 = $280,000.

Therefore, the company's total revenue for the past year was $280,000.

Estimating Future Quantity Supplied at a Proposed Price

To determine the expected quantity supplied if the price is lowered to $63, we employ the demand elasticity formula:

Elasticity (E) = (% Change in Quantity) / (% Change in Price).

Rearranged to find the percentage change in quantity:

% Change in Quantity = E × % Change in Price.

The percentage change in price:

% Change in Price = [(New Price - Old Price) / Old Price] × 100 = [($63 - $70) / $70] × 100 = (-$7 / $70) × 100 ≈ -10%.

Given E = -2.5,

% Change in Quantity = -2.5 × (-10%) = 25%.

The new quantity demanded:

Q_new = Q_old × (1 + % Change in Quantity) = 4,000 × (1 + 0.25) = 4,000 × 1.25 = 5,000 units.

Rounding to the nearest whole number, the company should expect to supply approximately 5,000 skateboards at the new price of $63.

Calculating Total Revenue at the Proposed Price

Total revenue at the $63 price point:

TR_new = $63 × 5,000 = $315,000.

This shows an increase in total revenue compared to the previous $280,000, indicating that lowering the price to $63 is beneficial given the high elasticity.

Impact of Price Change on Total Revenue

Since elasticity magnitude exceeds 1 (-2.5), demand is elastic. The reduction in price from $70 to $63 causes total revenue to increase from $280,000 to $315,000. This demonstrates that, for elastic products, a price decrease boosts total revenue, aligning with economic theory expectations.

Insights from the Ice Cream Scenario

In the supermarket scenario, the calculation of the price elasticity of vanilla ice cream involves the percentage change in quantity demanded relative to price change:

% Change in Price = [(New Price - Old Price) / Old Price] × 100 = [($3 - $3.50) / $3.50] × 100 ≈ -14.29%.

% Change in Quantity = 20%.

Elasticity (E) = 20% / 14.29% ≈ 1.4.

If the absolute value of elasticity exceeds 1, the demand is elastic, implying that a price reduction leads to a proportionately larger increase in quantity demanded and thus higher total revenue. The increase in sales for vanilla ice cream, coupled with the elasticity estimate, confirms that decreasing prices can effectively boost revenue in elastic markets.

In contrast, the increase in chocolate syrup sales by 10% following a 14.29% price decrease in vanilla ice cream illustrates cross-price elasticity. Since chocolate syrup is a complementary good, its demand rises when the related good's price drops, implying a positive cross-price elasticity, which can influence marketing and pricing strategies across product lines.

Conclusion

The analysis of The Teenager Company’s skateboard sales underscores the significance of understanding price elasticity in strategic decision-making. Lowering the price to $63, based on an elasticity of -2.5, would likely increase total revenue from $280,000 to around $315,000, confirming the importance of elastic demand considerations. Similarly, the supermarket example demonstrates how elasticity measurements inform pricing strategies that optimize sales and revenues. Recognizing elasticity’s role across different markets allows companies to align their pricing policies with consumer responsiveness, ultimately maximizing profitability and market competitiveness.

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