Question

3) You make a lightweight compact foldable windbreaker. Your brand, Desert Wind Jackets, is well established in the Southwest. In a drive to broaden your appeal and open new markets, you have rebranded under the simple logo DWJ. The strength of your brand, loved by your customers in the Southwest, means you have a price elasticity on demand of -2.76. Market research indicates that in the Upper West, where there is some knowledge of your brand, the price elasticity of demand is -3.50. In New England, where you are least known, it is estimated that the price elasticity of demand will be quite high, -5.76. Your marginal cost per jacket is $198.33.

a) What price will you charge in your southwestern region?
b) What price will you charge in your upper-western region?
c) What price will you charge in your New England region?

Answer 1

To determine the optimal price for each region, you need to calculate the price elasticity midpoint and use it to determine the price that maximizes revenue. In the Southwest, where the price elasticity of demand is -2.76, you can set a price that maximizes revenue. In the Upper West, where the price elasticity is -3.50, and in New England, where the price elasticity is -5.76, the prices should be adjusted to maximize revenue.

Step-by-step explanation:

a) Based on the price elasticity of demand of -2.76 in the Southwest, you can set a price that maximizes your revenue. To do this, you need to determine the price elasticity midpoint. The formula for calculating the price elasticity midpoint is (P1 + P2) / 2. In this case, you can use the current price and estimate the percentage change in quantity demanded for a 1% increase and decrease in price. Once you have the price elasticity midpoint, you can use it to determine the price that maximizes revenue using the formula for optimal price: P1 * (1 + 1 / |E|).

b) In the Upper West, where the price elasticity of demand is -3.50, you can follow the same process outlined in part a to determine the price that maximizes your revenue.

c) In New England, where the price elasticity of demand is -5.76, the demand is highly elastic. In this region, you should set a lower price to encourage sales and increase revenue.

Answer 2

DWJ should charge:

Southwest: $274.97

Upper West: $240.60

New England: $216.25

How to solve

DWJ Jacket Prices by Region:

a) Southwest Region:

Brand loyalty in the Southwest results in a price elasticity of demand of -2.76.

To maximize profit, set the marginal revenue equal to marginal cost ($198.33).

Marginal revenue = Price * (1 + 1/Price Elasticity of Demand)

Solving the equation: Price = $274.97 (rounded to two decimal places).

b) Upper-West Region:

Moderate brand awareness leads to a price elasticity of demand of -3.50.

Following the same profit maximization strategy: Price = $240.60.

c) New England Region:

Limited brand recognition results in a high price elasticity of demand of -5.76.

Optimal price: Price = $216.25.

Therefore, DWJ should charge:

Southwest: $274.97

Upper West: $240.60

New England: $216.25