You provide therapeutic massage services, focusing on stress reduction services
ID: 1202433 • Letter: Y
Question
You provide therapeutic massage services, focusing on stress reduction services that are not covered by insurance. Your monthly overhead is $2,000. You value your time at $20 per half hour (how long a therapeutic massage takes). Supplies per massage cost $4. You currently charge $75 per massage and have a volume of 100 clients per month. Your trade journal says that a 5 percent reduction in prices typically results in a 7.5 percent increase in volume. what would happen to your volume, revenues, and profits if you cut your price to $70? If you raised your price to $80?
Explanation / Answer
Price elasticity of demand = %change in quantity demanded / %change in price
PED = 7.5 / -5 = -1.25.
* If the price in reduced by $5
% change in price = -6.6%
1.25 = %change in quantity / -6.66
% change in quantity demanded = -1.25 x -0.66 = 8.325%
The client volume will increase to 108.325
Total revenue = 70 x 108.325 = $7,582.75
Total costs = $2,000 + $20x100 + $4x100 = $4,400
Profit = $7,582.75 - $4,400 = $3,182.75.
* If the price is increased to $80
% change in price level = 6.66
-1.25 = %quantity demanded / 6.66
% change in quantity demanded = -1.25 x 6.66 = -8.325 (reduction in quantity
The client volume will decrease to 91.675
Total revenue = 91.675 x $80 = $7,334
Total cost = $4,400
Profit = $7,334 - $4,400 = $2,934.
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