After you complete your MBA you decide to open a business, named DirectDelivery. DirectDelivery is a courier service in Austin, TX which delivers packages within Austin city limits within half a day, door to door. The packages are delivered by taxi drivers, and customers are mainly law firms who want fast, secure delivery of important documents. Normally each delivery charge is $15.00
And the average number of deliveries per month is 6,000
But DirectDelivery would like to increase its volume, so this month it cut the price to $12.00
With the price cut, the number of deliveries increased to 7,000
Questions
1. What is DirectDelivery's elasticity of demand?
2. Is demand elastic, inelastic, or neither?
3. What does elastic, inelastic, or neither tell us about the elasticity of demand?
4. Why does this matter?
5. Have DirectDelivery's profits increased or decreased as a result of the price cut?
6. By how much?
7. Was the price cut a success or failure?
8. What price should DirectDelivery charge next month? $12.00 or $15.00
9. Why?