Question

Blue Split sells ice cream cones in a variety of flavours. The following are data for a recent week: Revenue (1,000 cones at $1.85 each) $1,850 Cost of ingredients $660 Rent 540 Store attendant 640 1,840 Pretax income $10 The manager estimates that if she were to increase the price of cones from $1.85 to $2.02 each, weekly volume would be cut to 850 cones due to competition from other nearby ice cream shops. Estimate the profit-maximizing price per cone.

Answer 1

Answer:

$1.40

Explanation:

Per cent change in price = ($2.02– $1.85)/$1.85 = +9%

Per cent change in demand = (1000 – 850)/1000 = –15%

The elasticity is = ln(1 + per cent change in quantity sold)/ln(1 + per cent change in price)

= ln(1 – 0.15)/ln(1 + 0.09)

= –0.16252/0.08618

= –1.886

Variable cost = $660/1000

Profit-maximising price = [–1.886/(–1.886+1)]*$0.66 = $1.40