You have taken a job as pricing manager for a very fine men's clothing line that sells high-end, tailored shirts, suits, etc. The firm is interested in increasing its revenues. Because it is a "high-end" clothier your boss does not what to have a "sale" on shirts or sweaters; he would actually rather increase the prices on either the firm's tailored shirts or the firm's hand-knit sweaters.
Because you are taking MBA674 at Park University you know that, depending on the elasticity of demand, it is possible to increase the prices for shirts or sweaters, sell fewer units but actually increase your revenues.
The last time you increased the prices on your shirts and sweaters the shirts went from $300 each to $320 each and the sweaters went from $400 each to $430 each.
The corresponding change in demand was: Shirts dropped from an average sales of 260 a month to 242, while sweaters dropped from an average sales of 200 a month to 188.
Using the formulas found in Thomas and Maurice, calculate the price elasticity of demand for shirts and sweaters. Show me your calculations.
Which one, shirts or sweaters, has a demand elasticity that will allow you to increase the price, sell fewer units BUT still increase your revenues?
Take the one you have chosen, shirts or sweaters, and increase the price 20% from the current price (the current price is $320 for shirts and $430 for sweaters) and show the new quantity demanded at that price as we did in class. Also, show that the new total revenue will be greater than then old total revenue.