You manage The Springvale Seaside Caramel Company which makes a chocolate – caramel truffle for sale to gift shops from Cape Cod to Mount Desert Island near Bar Harbor Maine. The company sells individually wrapped candies in boxes of 50 for $81.00 each. The candies retail for $3.99 for an individual piece and sales have been strong. The owners of the Seaside would like to increase its sales and profits. They know that, if price is lowered, they will generate more sales. Sales are typically steady at 35,000 boxes per month from May through October. Last year they sold 35,000 boxes in May. So they run an experiment. Price is lowered to $73.00 per box in May of this year and the number of deliveries increases to 37,000.
What is the Price Elasticity of Demand?
Is elasticity elastic, inelastic or neither?
What does this mean and why does it matter?
Will Revenues increase or decrease as a result of the price cut? By How much?
You calculate that the fixed costs for the Springvale Seaside Caramel are $25,000 per month and each box costs $48 for the labor, candy, packaging and shipping. Will profits go up or down as a result of the price cut? By How much? (Profits are revenue minus all costs.)