Exam 15: Pricing Practices

A 50% markup on cost is equivalent to a markup on price of:

Markup on Cost. Stinging Pesticides, Inc., provides scorpion control services, to residential and business customers in the El Paso area. The company recently raised its service price from $70 to $80 per annual treatment. As a result, sales fell to 37,500 from 52,500 treatments in the year earlier period. A. Calculate the arc price elasticity of demand for SPI service. B. Assume that the arc price elasticity (from Part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $48 per unit for labor and materials, calculate SPI's optimal markup on price and its optimal price.

During peak periods:

If e_P = -3, the optimal markup on price is:

If the optimal markup on price is 50%, the optimal markup on cost is:

Optimal Price. Lean Jeans, Inc., recently offered rebates of $1 off the regular $50 price on their low-rider jeans. Sales responded, rising 4% over the previous month's level. A. Calculate the point price elasticity of demand for Lean Jeans. B. If marginal cost per unit is $20, was the original $50 price optimal?

A by-product:

Price discrimination exists when:

Optimal Markup. Mary Richards is a pricing manager of Caring Move, Inc., a local visiting nurse firm in the home care market. Richards has been asked to complete an analysis of profit margins for the firm. Unfortunately, her predecessor on this project was abruptly terminated, leaving only sketchy information on existing pricing practices.

With price discrimination, higher prices are charged when:

Markup on Cost. Chim-Chimery, Inc., offers chimney sweepings in the Montpelier, Vermont area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Chim-Chimery has been forced to reduce the average price for chimney cleaning by 4%, but has enjoyed an 8% increase in demand. Meanwhile, marginal costs have held steady at $25 per cleaning. A. Calculate the point price elasticity of demand for chimney cleaning. B. Calculate Chim-Chimery's optimal price and markup on cost.

Price Discrimination. The Fun-Land Amusement Park is a 40-acre fun park full of rides, shows, and shops. Fun-Land's marketing department segments its customer base into two parts: local patrons and tourists. Fun-Land assumes local patrons are more price sensitive than out-of-town tourists. Yearly demand and marginal revenue relations for overnight lodging services, Q, are as follows: Average variable costs for labor and materials are constant at $20 per unit.

Optimal Price. Nice Bicycles, Inc., recently offered rebates of $10 off the regular $400 price on Triath model bikes. Sales responded, rising 5% over the previous month's level. A. Calculate the point price elasticity of demand for Triath bicycles. B. If marginal cost per unit is $200, was the original $400 price optimal?

If the optimal markup on cost is 25%, the optimal markup on price is:

Successful price discrimination requires:

When engaging in short-run incremental analysis, managers should ignore:

Markup on Price. Carpet Magic, Inc., provides professional, in-the-home carpet cleaning services to residential customers in the Binghamton, New York area. The company recently raised its service price from $94.50 to $121.50 per room. As a result, sales fell to 5,000 from 7,000 units in the year-earlier period. A. Calculate the arc price elasticity of demand for Carpet Magic service. B. Assume that the arc price elasticity (from part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $30.375 per unit for labor and materials, calculate Carpet Magic's optimal markup on price and its optimal price.

Incremental Analysis. St. Thomas Printing Company is a small printer serving the greater Minneapolis-St. Paul metropolitan area. The company recently bid on a government contract for the printing of a new pamphlet explaining phone scams. St. Thomas Printing has incurred bid development and marketing expenses of $250 prior to submission of the bid. The bid was based on the following projected costs:

A firm supplying a single product to two distinct submarkets will maximizes profits by equating:

Markup on Cost. King Midas Muffler, Inc., offers automobile muffler replacement at a number of outlets in the greater Boston area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, King Midas has been forced to reduce the average price for mufflers by 3%, but has enjoyed an 18% increase in customer traffic. Meanwhile, marginal costs have held steady at $74.97 per muffler. A. Calculate the point price elasticity of demand for mufflers. B. Calculate King Midas' optimal price and markup on cost.