Understanding the Effects of Pricing on Revenues, Costs and Pricing

Instructions: Please copy just the section below titled "Really Annoying Bicycle Messenger Case" to your computer. You do not need to include these instructions.

After 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.

Post your completed sheet to Assignments, NOT to the Discussion Conference. Then post your comment on the main ideas that you learned from this exercise in the Discussion Conference for Week 1 in the thread provided.

Below is what you need to copy.

Really Annoying Bicycle Messenger Case

Understanding the effects of pricing on revenues, costs and pricing

Introduction: 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-b. Is elasticity elastic, inelastic or neither?
1-c. What does this mean and why does it matter?
1-d. Will revenues increase or decrease as a result of the price cut? 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?

2. Shaun suggests that there wasn't 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-b. Is elasticity elastic, inelastic or neither?
2-c. What does this mean and why does it matter?
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-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?

3. 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-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-c What will be the revenue?
3-d. What will be the profit?
3-e Should Really Annoying Bicycle Messenger Company raise the price to $11.00? Why or why not?

4. 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.

Choose one additional question (relating to different topic), either "Government Price Controls' or "Free Trade" in the discussion area and answer it.