Your marketing department just undertook a major advertising campaign promoting the quality of your Best Brand Bike Shorts-BBB Shorts

Economics Dec 19, 2020

Your marketing department just undertook a major advertising campaign promoting the quality of your Best Brand Bike Shorts-BBB Shorts. They have provided you with an estimate of the success of the campaign stating: "the price elasticity of demand has decreased from -5.76 to -3.76." Before the campaign your price was $240 per pair of BBB Shorts. What should be the new price?

Expert Solution

Let elasticity e1 = -5.76 and e2 = -3.76

Assuming marginal cost is equal to MC

Without Promotion

Optimal Price at e1 = MC/(1+1/e1) = $240

$240 = MC /(1+1/e1) .......(X)

With promotion

Price = P2 = MC/(1+1/e2).......(Y)

Dividing X and Y

$240/P2 = (1+1/e2)/(1+1/e1)

P2 = 240*(1+1/-5.76) / (1+1/-3.76)

P2 = $270.2

Therefore

price after promotion is $270.2

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