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Understanding the effects of pricing on revenues, costs and pricing
Introduction: You have recently been hired as the manager of MBA Deli.   You have been asked to improve profitability.  
1. Analysis of Pricing: You manage MBA Deli which sells meals at a price of $6 each.   The average number of meals sold per month is 7,000. MBA Deli would like to increase its sales and profits.   The MBAs running the Deli, know that if price is lowered, they will sell more meals.   So they run an experiment.   Price is lowered to $5 per meal in October and the number of meals sold increases to 8,000.
Price Qty Revenue
Month 1 $6 7,000 $42,000
Month 2 $5 8,000 $40,000
Month 3 $2.50

a. What is the Price Elasticity of Demand?
(Q2-Q1)/Q1 = (P2-P1)/P1 = Q/D=
0.142857 -0.16667 -0.86

b. Is elasticity elastic, inelastic or neither? It is inelastic as the elasticity is below than 1
c. What does this mean and why does it matter? It means that any change in price will have an impact on demand less than change in price for example if the change in price is 20%, the change in demand will be 0.86 of 20% and it will be 17.2%
d. Will Revenues increase or decrease as a result of the price cut? Decline By How much? Revenue will decreased by $2,000 (7000*6 – 8000*5)

e. Beatrice has calculated the fixed costs for the Deli are $14,000 per month and each meal costs $2.50.   Will profits go up or down as a result of the price cut?   By How much? The contribution margin at $6 = 6-2.5*7000 = 24500
And the CM at $5 = 5-2.5*8000 = 20000
The profit will go down by 24500-20000 = $4500


2. Warren   suggests that there wasn’t enough time in the experiment.   He estimates that in the second month, MBA Deli will sell 9,000 meals.   Please answer the following assuming that Warren is correct.
Price Qty Revenue
Month 1 $6 7,000 $42,000
Month 2 $5 9,000 $45,000

a. What is the Price Elasticity of Demand?
(Q2-Q1)/Q1 = (P2-P1)/P1 = Q/D=
0.285714 -0.16667 -1.71

b. Is elasticity...

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