Understanding the effects of pricing on revenue and costs

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Reference no: EM131570263

Understanding the effects of pricing on revenue, costs, and pricing

1. Analysis of Pricing: You manage The Really Annoying Bicycle Messenger Company which makes deliveries for lawyers, consultants, accountants, and lobbyists in the much of Washington DC including Georgetown. The company makes deliveries of documents and small packages at a price of $10.00 each. The average number of deliveries in one month is 31,000. The owners of the Really Annoying Bicycle Co. would like to increase its sales and profits. They know that, if the price is lowered, they will generate more deliveries. So they run an experiment. Price is lowered to $9.00 per delivery in May and the number of deliveries increases to 33,000.

a) What is the Price Elasticity of Demand?

b) Is elasticity elastic, inelastic or neither?

c) What does this mean and why does it matter?

d) Will Revenues increase or decrease as a result of the price cut? By How much?

e) Beatrice has calculated the fixed costs for the Really Annoying are $15,000 per month and each bicycle messenger receives $5.50 per delivery. Will profits go up or down as a result of the price cut? By How much?

f) Profits are revenue minus all costs.

2. Shaun suggests that there wasn’t enough time in the experiment. He estimates that in the second month, June, the Really Annoying Company will have 36,000 deliveries at $9.00. Please answer the following assuming that Shaun is correct. You want to get an idea of what will happen to profits before you commit to an action. If profits go up assuming that Shaun is correct, then you will keep the current price of $9.00 during June. If the profits go down, you plan to return to $10 per delivery.

a) What would be the Price Elasticity of Demand if Shaun is correct?

b) Is elasticity elastic, inelastic or neither?

c) What does this mean and why does it matter?

d) Will Revenues increase or decrease as a result of the price cut to $9.00 at 36,000 deliveries? By How much?

e) Beatrice has calculated the fixed costs for the Really Annoying are $15,000 per month and each delivery costs $5.50. Will profits go up or down as a result of the price cut if Really Annoying has 36,000 deliveries? By How much?

3. The Really Annoying owners see the change in profits from the price decrease in May and the projection for June. They decide to go back to a price of $10.00 and have 31,000 deliveries in June. They decide that they are only willing to manage enough bicycle messengers to support 31,000 deliveries at a price of $10.00. However, if they raised the price to $11.00 per delivery, they would be willing to hire and manage enough messengers to make 45,000 deliveries in July.

a) Calculate the Elasticity of Supply. Is it elastic or inelastic?

b) How many deliveries will Really Annoying have at a price of $11.00? Hint: you can only sell what customers will buy. Use the original the elasticity of demand calculated in 1 above.

c) What will be the Revenue?

d) What will be the Profit?

e) Should Really Annoying Bicycle Messenger Company raise the price to $11.00? Why or why not?

Reference no: EM131570263

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