Understanding the Effects of Pricing on Revenues, Costs and
PricingAfter copying the sheet below to your computer, then write
your brief answers in the slots provided.
You are expected to answer Question 1 through 3 with one or two word
answers. Your answers to Question 4
should also be very brief. Any calculations must be shown at the end of this
answer sheet and not in the answer slots.
Really Annoying Bicycle Messenger CaseUnderstanding the effects of pricing on revenues, costs and
pricingIntroduction: It is April and you have recently been hired
as the manager of Really Annoying Bicycle Messenger Company in Washington, DC.
You have been asked to improve profitability. (The company got its name from
tweets from automobile drivers stuck in traffic.) You are discussing the pricing with two other
managers, Shaun and Beatrice.Note: Please use Excel for all calculations.1. Analysis
of Pricing: You manage The Really Annoying Bicycle Messenger company which
makes deliveries for lawyers, consultants, accountants, and lobbyists in most
of Washington DC including Georgetown. The company makes deliveries of
documents and small packages at a price of $10.00 each. The average number of
deliveries in one month is 31,000. The owners of the Really Annoying Bicycle
Co. would like to increase its sales and profits. They know that, if price is
lowered, they will generate more deliveries. So they run an experiment. Price
is lowered to $9.00 per delivery in May and the number of deliveries increases
to 33,000.1-a. What is the
Price Elasticity of Demand? 1-a. 1-b. Is elasticity elastic,
inelastic or neither? 1-b.1-c. What does this mean and why does it matter? 1-c.
1-d. Will revenues
increase or decrease as a result of the price cut? By How much? 1-d. Revenues up or
down? __________ By how
much?________________1-e The company has
calculated the fixed costs for the Really Annoying are $15,000 per month and
each bicycle messenger receives $5.50 per delivery. Will profits go up or down
as a result of the price cut? By How much? 1-e. Profits up or
down? __________ By how
much?________________15 points 2. Shaun
suggests that there wasnât enough time in the experiment. He estimates that in
the second month, June, the Really Annoying Company will have 36,000 deliveries
at $9.00. Please answer the following assuming that Shaun is correct. You want
to get an idea of what will happen to profits before you commit to an action.
If profits go up assuming that the manager is correct, then you will keep the
current price of $9.00 during June. If the profits go down, you plan to return
to $10 per delivery.2-a. What would be
the Price Elasticity of Demand if the manager is correct? 2-a.
_____________________________ 2-b. Is elasticity
elastic, inelastic or neither? 2-b. _____________________________2-c. What does this mean and why does it matter? 2-c.
2-d. Will revenues increase or decrease as a result of the
price cut to $9.00 at 36,000 deliveries? By How much? 2-d. Revenues up or
down?______________ By how much? ___________________2-e. Beatrice has
calculated the fixed costs for the Really Annoying are $15,000 per month and
each delivery costs $5.50. Will profits go up or down as a result of the price
cut if Really Annoying has 36,000 deliveries? By how much? 2-e. Profits up or
down? ________________ By how
much? ___________________ 15 Points3. The Really
Annoying owners see the change in profits from the price decrease in May and
the projection for June. They decide to go back to a price of $10.00 and have
31,000 deliveries in June. They decide that they are only willing to manage
enough bicycle messengers to support 31,000 deliveries at a price of $10.00.
However, if they raised price to $11.00 per meal, they would be willing to hire
and manage enough messengers to make 45,000 deliveries. 3-a. Calculate the
elasticity of supply. Is it elastic or
inelastic? 3-a. Elasticity of
Supply: ______________Is it elastic or inelastic? _________________3-b. How many deliveries
will Really Annoying have at a price of $11.00? Hint: you can only sell what
customers will buy. Use the original the elasticity of demand calculated in 1
above. 3-b.
_____________________________ .3-c What will be the
revenue? 3-c
____________________________. 3-d. What will be the
profit? 3-d.
_______________________________ 3-e Should Really
Annoying Bicycle Messenger Company raise
the price to $11.00? Why or why not? 3-e. Raise price, yes
or no? _____________Why or why not? 20 Points4. What did you learn from this case? Post
your response here on this answer sheet (below) and ALSO post your response to
this question about what you learned to the Week 1 Discussion area. Do not post your replies to the first three
question in the Discussion area, only your response to this final part. 10 PointsChoose one additional question (relating to different
topic), either “Government Price Controls’ or “Free Trade” in
the discussion area and answer it. 40 PointsQuestions on Fair Trade In this election year, the discussion about open markets
versus protectionism has become very heated.
The standard economic theory argues that free global trade benefits all
partners far more than protectionism. You
are free to disagree with this theory in your responses to the following
questions but if you disagree, you must support your arguments with a
well-reasoned argument, supported by facts and statistics. Read the article on Free Trade from The Concise Encyclopedia
of Economics (http://www.econlib.org/library/Enc/FreeTrade.html) and review the
following sites. http://www.econlib.org/library/Essays/rdPncl1.html http://www.freetheworld.com/2008/EconomicFreedomoftheWorld2008.pdfhttp://www.econlib.org/library/Enc/Capitalism.htmlhttp://www.brownconsultancy.com/ds-theory-international-trade.aspxhttp://www.slideshare.net/shanmugapriya/international-trade-theories-presentationhttp://www.fao.org/docrep/003/x7352e/x7352e02.htmPlease feel free to expand on these resources by doing your
own research.Then answer the following questions.1 Why
should countries engage in international trade rather than remaining
self-sufficient and avoiding the unfair competition of low-paid foreign
workers?2. If our country can make everything better and cheaper
than foreigners, why would we have any reason to be involved in international
trade?3. Should we âbuy Americanâ instead of outsourcing trade and
jobs to foreigners?4. If we do engage in
foreign trade, should we limit foreign trade to nations that engage in âfair
tradeâ by giving us access to their domestic markets and reciprocal import
tariff reductions that mirror our tariff reductions on our imports from them?
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