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Bicycle Case

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Bicycle Case (6% of course grade)

Understanding the effects of pricing on revenues, costs and pricing

 

  1. (30 points):  Analysis of Pricing: You manage The Really Annoying Bicycle Messenger Company   which makes deliveries for lawyers, consultants, accountants, and lobbyists in the much of Washington DC including Georgetown.   The company makes deliveries of documents and small packages at a price of $10.00 each.  The average number of deliveries in one month is 31,000. The owners of the Really Annoying Bicycle Co.  would like to increase its sales and profits.  They know that, if price is lowered, they will generate more deliveries.   So they run an experiment.  Price is lowered to $9.00 per delivery in May and the number of deliveries   increases to 33,000.
    1. What is the Price Elasticity of Demand?
    2. Is elasticity elastic, inelastic or neither?
    3. What does this mean and why does it matter?
    4. Will Revenues increase or decrease as a result of the price cut? By How much?
    5. Beatrice has calculated the fixed costs for the Really Annoying are $15,000 per month and each bicycle messenger receives $5.50 per delivery.  Will profits go up or down as a result of the price cut?  By How much?
    6. Profits are revenue minus all costs.

 

 

  1. (30 points): Shaun  suggests that there wasn’t enough time in the experiment.  He estimates that in the second month, June, the Really Annoying Company will have 36,000 deliveries at $9.00.  Please answer the following assuming that Shaun  is correct.  You want to get an idea of what will happen to profits before you commit to an action. If profits go up assuming that Shaun is correct, then you will keep the current price of $9.00 during June. If the profits go down, you plan to return to $10 per delivery.
    1. What would be the Price Elasticity of Demand if Shaun is correct?
    2. Is elasticity elastic, inelastic or neither?
    3. What does this mean and why does it matter?
    4. Will Revenues increase or decrease as a result of the price cut to $9.00 at 36,000 deliveries?  By How much?
    5. Beatrice has calculated the fixed costs for the Really Annoying are $15,000 per month and each delivery costs $5.50.  Will profits go up or down as a result of the price cut if Really Annoying has 36,000 deliveries?  By How much?

 

  1. (40 points): The Really Annoying owners see the change in profits from the price decrease in May and the projection for June.  They decide to go back to a price of $10.00 and have 31,000 deliveries in June.  They decide that they are only willing to manage enough bicycle messengers to support 31,000 deliveries at a price of $10.00.  However, if they raised price to $11.00 per delivery, they would be willing to hire and manage enough messengers to make 45,000 deliveries in July.    
    1. Calculate the Elasticity of Supply.  Is it elastic or inelastic?
    2. How many deliveries will Really Annoying have at a price of $11.00?  Hint: you can only sell what customers will buy.  Use the original the elasticity of demand calculated in 1 above.
    3. What will be the Revenue?
    4. What will be the Profit?
    5. Should Really Annoying Bicycle Messenger Company raise the price to $11.00? Why or why not?

 

Complete the remainder of the week's assignment in the discussion area.



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14-06-22 | 21:27:53

A) What is the Price Elasticity of Demand?
% change in Q = (33000-31000)/31000 = 6.45%
% change in P = (9-10)/10 = -10%
Elasticity of demand = % change in Q / % change in P = 6.45%/10% = -0.645
b) Is elasticity elastic, inelastic or neither? Since elasticity

You can't get real answer if you break your security system. hywnfj in Q = (99777-98777)/98777 = 2.16% % hywnfj in P = (4-87)/87 = -87% Elwstihity ov cjmwnc = % hywnfj in Q / % hywnfj in P = 2.16%/87% = -7.216 t) Is jlwstihity jlwstih, injlwstih or njityjr? Sinhj jlwstihity vwluj is ljss tywn 8, cjmwnc is in-jlwstih h) Wywt cojs tyis mjwn wnc wyy cojs it mwttjr? Tyis mjwns tywt w 8% hywnfj in prihjs will hywnfj quwntity cjmwncjc ty 7.216% in tyj oppositj cirjhtion. Tyj hywnfj in cjmwnc is ljss tywn hywnfj in prihj. c) Will Rjvjnujs inhrjwsj or cjhrjwsj ws w rjsult ov tyj prihj hut? By How muhy? Initiwl TR = PQ = 87(98777) = $987,777 Njw TR = P’Q’ = 4(99777) = $544,777 Tyus, TR yws cjhrjwsjc ty $89,777 j) Bjwtrihj yws hwlhulwtjc tyj vixjc hosts vor tyj Rjwlly Annoyinf wrj $86,777 pjr monty wnc jwhy tihyhlj mjssjnfjr rjhjivjs $6.67 pjr cjlivjry. Will provits fo up or cown ws w rjsult ov tyj prihj hut? By How muhy? Fixjc hosts vor rjwlly Annoyinf=$86777 Vwriwtlj cjlivjry host=$6.67*99777 Totwl Cost =842677 Provit wvtjr prihj hut= TR-TC =877677 Provit Initiwlly = Inititwl Totwl Rjvjnuj =987,777 Initiwl host=836677 provit=851677 v) Bjwtrihj yws hwlhulwtjc tyj vixjc hosts vor tyj Rjwlly Annoyinf wrj $86,777 pjr monty wnc jwhy tihyhlj mjssjnfjr rjhjivjs $6.67 pjr cjlivjry. Will provits fo up or cown ws w rjsult ov tyj prihj hut? By How muhy? Uncjr $87, your provit = $987,777 - 86,777 - (6.67*98,777) = $851,677 provit Uncjr $4, your provit = $951,777 - 86,777 - (6.67*92,777) = $888,777 provit So iv you cjhrjwsj prihj to $4, you jnc up losinf $89,677. You syoulc not cjhrjwsj tyj prihj


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