1. Assume that you manage a retail garden center. You have purchased 1000 plants
ID: 1226811 • Letter: 1
Question
1. Assume that you manage a retail garden center. You have purchased 1000 plants in 1 gallon containers for $1.50 each. The prevailing retail price in your market area is $3.29 each. You price the plants at $3.29 and sell 225 in the first week. In the second week you reduce the price by 10 percent and sell 240 plants.
a) What was total revenue during the first week of sales and the second week of sales?
b) Did the price decrease cause total revenue to increase or decrease in the second week of sales?
c) Which section of the demand curve are the plants priced in? Justify your answer.
d) Assume that there is a four week marketing window in your area for the plants that you are selling. Since you ordered 1000 plants, you will need to sell an average of 250 plants per week to sell all you have purchased. To date, you have sold 465 plants and you have two weeks to sell the additional 535 plants. If your objective is to sell all the plants at the end of the season, you are going to have to lower the price again. You lower the price another 10 percent to $2.66 for the third week of sales and sell 252 plants. You have 283 plants to sell in the fourth week. In desperation, you lower the price an additional 30 percent for the fourth week to $1.86. At the end of the fourth week, you have sold all the plants you purchased. Calculate the total revenue for the third and fourth week of sales.
e) Calculate the net revenue from selling the 1000 plants over the four week period. Use only the cost of the plants purchased to make this calculation.
f) Calculate the price elasticity of demand for each price change. g) What did the price elasticity of demand do for each price change? h) What did the total revenue do each time you lowered the price?
Explanation / Answer
a)
TR=PQ
WEEK 1
3.29*225=740.25
WEEK 2
P=3.29(1-10%)=2.96
TR=2.96*240=710.64
b)Price decrease decreased total revenue since at TR=PQ
c)
The plants are on the inelastic portion of the demand curves,since fall in price does not lead to too much change in quantity.
d)week 3
TR=2.66*252=670.32
WEEK 4
TR=283*1.86=526.38
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