1. Spooky Halloween Stores (17 points)
Spooky Halloween Stores’ marketing analytics group has estimated the following elasticities for
the retailer’s witch costume, fake nose, and Superman costume:
Price elasticities of demand (in absolute value terms): Witch costume 5.1
Fake nose 3.0
Superwoman costume 7.5Cross price elasticities of demand
Of the witch costume with respect to the price of the Superwoman costume 1.5
Of the witch costume with respect to the price of the fake nose -0.5Income elasticity of demand Witch costume 0.5
Fake nose 1.0
Superwoman costume 1.2Please answer the following questions based on the above estimates and show your work. Make
sure to type your answers.a. (4 points) If you increase the price of the Superwoman costume by 2%, what is your
estimate of the percentage change in the volume of the Superwoman costumes sold?
b. (4 points) If you increase the price of the Superwoman costume by 2%, what is your
estimate of the percentage change of witch costumes sold?
c. (2 points) If you increase the price of the Superwoman costume by 2%, would you
predict the total revenue from Superwoman costume sales increases, decreases, or stays
the same? Briefly explain.
d. (2 points) Are witch costumes and fake noses substitutes or complements? How can you
tell from the estimates?
e. (2 points) Comment on whether each of the three products is a normal or inferior good.
How can you tell from the estimates?
f. (3 points) If your marginal cost of each witch costume is $20, what price should you
charge for the costume? Explain
Spooky Halloween Stores, like many retailers, relies on accurate estimates of price elasticity, cross-price elasticity, and income elasticity of demand to make informed decisions about pricing, product relationships, and revenue optimization. In this essay, we will delve into the estimates provided by Spooky Halloween Stores’ marketing analytics group and use them to answer several key questions. We will explore the impact of price changes on Superwoman costumes and witch costumes, discuss the revenue implications of Superwoman costume pricing, identify product relationships, and classify the goods as normal or inferior. Furthermore, we will determine the optimal pricing strategy for witch costumes based on marginal cost considerations.
Price elasticity of demand measures how sensitive the quantity demanded of a product is to changes in its price. In Spooky Halloween Stores’ case, the following price elasticities are estimated:
Witch costume: 5.1
Fake nose: 3.0
Superwoman costume: 7.5
If the price of the Superwoman costume increases by 2%, the percentage change in the volume of Superwoman costumes sold is estimated to be 15%. This high elasticity indicates that Superwoman costumes are highly price-sensitive, and a price increase leads to a relatively larger decrease in quantity demanded.
When the price of the Superwoman costume increases by 2%, the percentage change in witch costumes sold is estimated at 3%. This moderate positive cross-price elasticity of 1.5 suggests that Superwoman costumes and witch costumes are substitutes, as an increase in Superwoman costume price leads to a slight increase in witch costume demand.
Given the price elasticity of Superwoman costumes at 7.5, a 2% price increase would lead to a decrease in total revenue. Elastic demand implies that the percentage change in quantity is greater than the percentage change in price, resulting in lower overall revenue. Therefore, total revenue from Superwoman costume sales is predicted to decrease with a price increase.
Witch costumes and fake noses are complements. This conclusion is drawn from the negative cross-price elasticity of -0.5, indicating that when the price of fake noses increases, the quantity of witch costumes sold decreases. These products are typically purchased together or considered complementary for Halloween costumes.
All three products, witch costumes, fake noses, and Superwoman costumes, are classified as normal goods. This categorization is based on the positive income elasticities for each product: witch costume (0.5), fake nose (1.0), and Superwoman costume (1.2). An increase in consumer income results in a proportional increase in the quantity demanded for these products.
To determine the optimal price for witch costumes that maximizes profit, we should consider both marginal cost and price elasticity of demand. With a marginal cost of $20, we set the price where price elasticity equals -1, which corresponds to a unitary price elasticity. The calculated price that ensures the maximum profit is $40 per witch costume.
Spooky Halloween Stores’ success in managing pricing strategies and optimizing revenue relies heavily on understanding various elasticities of demand. By considering the price elasticity, cross-price elasticity, and income elasticity, the retailer can make well-informed decisions regarding price changes, product relationships, and the nature of the goods they sell. Furthermore, by setting the optimal price for witch costumes based on marginal cost and elasticity, Spooky Halloween Stores can achieve a balance between maximizing profit and satisfying consumer demand during the Halloween season.
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