1. Ikes Tropical Foods specializes in the wholesale distribution of goods, such
ID: 1094765 • Letter: 1
Question
1. Ikes Tropical Foods specializes in the wholesale distribution of goods, such as rice, and beans. The firms manager is concerned about an article he read in this mornings Wall Street Journal indicating that the incomes of individuals in the lowest income bracket are expected to increase by10% over the next year. While the manager is happy to see this group of individuals do well, he is concerned about the impact it will have on his sales.
What do you think is likely to happen to the price of products sold by Ikes Tropical Foods? Explain
2. Bellsouth Mobility (BM) ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected 4 states that were representative of its entire service area and increased prices by 5% to subscribers in those areas. One month later, the number of its customers enrolled in BMs plans declined 4% in those states, while enrollments in states where prices were not increased remained flat. Based on this information, the manager estimated the own price elasticity of demand and based on her findings immediately increased prices in all markets by 5% in an attempt to boost the companys revenues. One year later, the manager was confused because BMs revenues were down 10%. Apparently, the price increase led to a reduction in the companys revenues.
Did the manager make a mistake? Explain
Explanation / Answer
b) The manager did commit a mistake because the price elasticity of demand is inelastic in this example. It is inelastic because increase in prices has lead to decrease in sales voume and a reduction in the company's revenue by 10%. The correct decision should have been that when the manager tested the response in four states, the manager should have rolled back the prices to its original price.
The competition is mobile services is oligopolistic in nature where very few and large firms exist in the market. In this kind of competition pricing plays a very important role because most competitors offer similar service and these days due to mobile number portability customers can very easily switch over to other service providers when a price rise takes place in their current service provider. Firms in oligopolistic competition exist by carefully observing the prices of other firms. If a firm lowers the price then competitors will also lower the prices so as to retain the customers. Hence price rise should be the last thing in the mind for managers as this will negatively impact the firms sales as other firms will now respond by either keeping their prices stable or lowering the prices further.
The manager could have thought of differentiating the service from other competitors as this would have been the best strategy to increase the sales volume and revenue.
a) While the firm
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