Deli Case Understanding the effects of pricing on revenues, costs and pricing Introduction:

You have recently been hired as the manager of MBA Deli. You have been asked to improve profitability.

1. Analysis of Pricing: You manage MBA Deli which sells meals at a price of $6 each. The average number of meals sold per month is 7,000. MBA Deli would like to increase its sales and profits. The MBAs running the Deli, know that if price is lowered, they will sell more meals. So they run an experiment. Price is lowered to $5 per meal in October and the number of meals sold increases to 8,000.

a. What is the Price Elasticity of Demand?

b. Is elasticity elastic, inelastic or neither?

c. What does this mean and why does it matter?

d. Will Revenues increase or decrease as a result of the price cut? By How much?

e. Beatrice has calculated the fixed costs for the Deli are $14,000 per month and each meal costs $2.50. Will profits go up or down as a result of the price cut? By How much?

2. Warren suggests that there wasn't enough time in the experiment. He estimates that in the second month, MBA Deli will sell 9,000 meals. Please answer the following assuming that Warren is correct.

a. What is the Price Elasticity of Demand?

b. Is elasticity elastic, inelastic or neither?

c. What does this mean and why does it matter?

d. Will Revenues increase or decrease as a result of the price cut? By How much?

e. Beatrice has calculated the fixed costs for the Deli are $14,000 per month and each meal costs $2.50. Will profits go up or down as a result of the price cut? By How much?

3. Bill says that if they raised price to $7 per meal, they would be willing to produce 10,000 meals.

a. Calculate the Elasticity of Supply. Is it elastic or inelastic?

b. How many meals will MBA Deli sell at $7 each? Use the original the elasticity of demand calculated in 1 above.

c. What will be the Revenue?

d. What will be the Profit?

e. Should MBA Deli raise price to $7? Why or why not?

4. Why is management willing to supply more at higher prices?

5. Why are the customers willing to buy more at lower prices and why do they buy less at higher prices?