Summer Ice, a company that specializes in ice gelato treats wishes to raise its total revenue. It can identify two different groups of buyers: children and adults. Currently its ice gelato treats are uniformly priced at $2.00 per serving. Summer Ice is considering reducing the price of its treats to $1 (a 67% decrease in price using the mid-point method). From its market research, it knows that the two groups of buyers are likely to respond according to the data in the table below:
|
Price
|
Quantity demanded by children QDC
|
Quantity demanded by adults QDA
|
|
$2
|
150
|
125
|
|
$1
|
400
|
175
|
1. What is the price elasticity of demand for each of these groups? (Use mid-point formula)
2. What is Summer Ice's total revenue if they sell their ice cream treats at a price of 2$
3. What is the total revenue if they sell at $1?
4. What is total revenue if they segment the market and charge $2 to adults and $1 to children? Now do the opposite and calculate if they charged children $2 and adults $1.
5. What price scheme in parts a-d results in the greatest total revenue for Summer Ice? Using your knowledge of price elasticity of demand, explain why this is the best pricing plan with regard to maximizing Summer Ice's total revenue in this market?