La Cabane à Sucre is a shop located in Quebec. It makes and sells taffy in a variety of flavours, including the local favourite, tire d’érable. Revenue and cost data for a recent week appear here:
Revenue (1,500 kg @ $6.00 per kg) ………………………………$9,000
Cost of ingredients ………………………………$2,400
Rent …………………………………………………800
Wages …………………………………………….3,200…………. 6,400
Pretax income ……………………………………………………..$2,600
All employees work standard shifts, regardless of how much taffy is produced or sold. Jasmine, the shop’s manager, estimates that if she were to decrease the price of taffy by $0.60 per kilogram to a new price of $5.40 per kilogram, weekly volume would increase by 20%.
REQUIRED
A. Calculate the price elasticity of demand.
B. Calculate the profit-maximizing price.
C. Based on the profit-maximizing price, does it appear that Jasmine should drop the price of the taffy? Why or why not?
D. List possible relevant factors that could influence Jasmine’s price decision. List as many factors as you can.
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