Question

The marketing director of the Reicken Furniture Company has determined that the demand curve for one of the dining room sets it sells indicates a constant price elasticity of -3.0. Given this information, what margin should Reicken require on this set?

Answer 1

The marketing director of the Reicken Furniture Company should require a margin that corresponds to the price elasticity of -3.0 for the dining room set.

Step-by-step explanation:

The marketing director of the Reicken Furniture Company should require a margin that corresponds to the price elasticity of -3.0 for the dining room set. Price elasticity measures the responsiveness of quantity demanded to a change in price. A constant price elasticity of -3.0 means that for every 1% increase in price, the quantity demanded will decrease by 3%. To calculate the margin, subtract the cost of producing the dining room set from the selling price and divide by the selling price. For example, if the cost of producing the set is $500 and the selling price is $1000, the margin would be (1000-500)/1000 = 0.5 or 50%.