Reference no: EM13206434
You have been hired as a price analyst for the Mountain Madness Bicycle Company. They want your advice about pricing for their top selling Buffalo Bomber downhill descender model. More specifically, they want to know whether they should raise or lower prices for the 2000 model year, other things being equal. You have been given the following data to make your analysis:
Year Units Sold Price/unit Average Income of Buyer Price of Main Competitor
1998 8,000 $ 1,200 $ 40,000 $ 900
1999 12,000 $ 900 $ 50,000 $ 1,000
a) Compute the following elasticities for the Buffalo Bomber using the arc-elasticity formula:
i) It's own price elasticity of demand.
ii) It's income elasticity of demand.
iii) It's cross-price elasticity of demand with respect to its main competitor.
b) Based on your estimate of the Buffalo Bomber's own price elasticity of demand (ignoring for the moment the changes in income and the price of the main competitor's bicycle), would the company be better off increasing prices for the new model year? Why? What would be the percentage impact on sales of a 10% increase in price? Explain what would likely happen to Total Revenue if they were to increase the price.
c) Given that both consumer income and the price of the main competitor's bicycle changed during the period in question, do you feel that your calculation of the Buffalo Bomber's own price elasticity of demand is accurate?
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