Compute the price elasticities of demand in each market and

Reference no: EM13390905

Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC's price for the typical lawn system was $1,900 compared with BLG's price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.)

GGC has substantial excess capacity-it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed several hundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows:

Qw =2100 - 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw

for the western market and

Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye

for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC's cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems.

Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.

1. Derive the demand curves for GGC's product in each market.

2. Derive GGC's marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGC's demand, MR, and MC curves for each market.

3. Derive algebraically the quantities that should be produced and sold, and the prices that should be charged, in each market.

4. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to be charged in each market.

5. Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendation

Reference no: EM13390905

Questions Cloud

Analyze the transitioning of early hospitals and the : 1 analyze the transitioning of early hospitals and the medical advancements up to the present time. justify the need

What do defenders of the market approach to environmental : what do defenders of the market approach to environmental responsibilities state about the ability of economic markets

Price is an important element of the marketing mix create a : assignment 1 pricing strategyprice is an important element of the marketing mix. create a 300ndash400-word response and

Once the training analysis is finished the organization : once the training analysis is completed the organization and employee development human resources specialist uses adult

Compute the price elasticities of demand in each market and : greener grass company ggc competes with its main rival better lawns and gardens blg in the supply and installation of

Northern manufacturing company found that during the last : northern manufacturing company found that during the last year it took an average of 43 days to pay its suppliers while

Identify at least one potential disadvantage to initiating : identify at least one potential disadvantage to initiating continuing andor expanding international operations.

The firm typically has collection period of 51 days and : netspeed technologies is a telecom component manufacturer. the firm typically has a collection period of 51 days and

Identify and discuss at least three things firms can do to : identify and discuss at least three things firms can do to diminish the risk of doing business internationally. discuss

User Account

All Pages