Question: Pricing Strategy & Elasticity (15 points)
Best Buy stocks two types of merchandise: a private-label portable DVD player and DVD disks as a complementary good for the DVD player. Originally, Best Buy priced the DVD player at $99, and then sold 1,200 units per week. After raising the price to $120, sales dropped to 1,000 units per week. Similarly, Best Buy priced one box of DVD disks at $25, and then sold 1,500 boxes per week. After lowering the price to $21, sales increased to 2,000 boxes per week.
(1) Please calculate the price elasticity for
i) DVD player and;
ii) DVD disk sold by Best Buy
(2) Marketers usually use price elasticity to examine how customers would respond to the change of the product prices. When the absolute value of price elasticity is greater than 1, it means that customers are price sensitive. When the absolute value of price elasticity is smaller than 1, it means that customer are price insensitive. Based upon the results from the previous question, price elasticity for 1) DVD player and 2) DVD disk, which product is price sensitive)? Which is price-insensitive?
(*Hint: if we get a price elasticity equals to -0.4, the absolute value of price elasticity is 0.4. Since it is smaller than 1, therefore it is price inelastic)
(3) Suppose the cost of a box of DVD disks is $12, what would be the profit-maximizing price of one box of DVD disks? (The equation for calculating profit-maximizing price is given as bellow)