Price Elasticity and Inelastic Demand
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We recently added the STARZ Network to our premium cable tier. Currently, 852 of our basic service subscribers purchase this service at our current price of $10.50 per month.
As you know, our current contributions from STARZ are not as high as we expected. I would like you to evaluate our current price to see if we might be able to raise or lower it to enhance the contributions of STARZ to our revenues.
In an earlier study of the feasibility of adding STARZ, the marketing department obtained the attached data on the demand and costs for this channel in our Region 1 service area. In addition to the fixed administrative costs, there is a variable cost (license fee) of $5.49 per customer. Please use these data to provide your recommendation about whether we should increase or decrease prices (from the $10.50 we are charging now) to increase total profits. I am particularly interested in (1) an estimate of our profit-maximizing price, and (2) an estimate of how much our monthly profit will increase if we adjust price to your recommended level.
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Solution Summary
This post explains the concept of price elasticity and how we can use it in real life for business decision making. Solution attached in Word with calculations in Excel.
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We recently added the STARZ Network to our premium cable tier. Currently, 852 of our basic service subscribers purchase this service at our current price of $10.50 per month.
As you know, our current contributions from STARZ are not as high as we expected. I would like you to evaluate our current price to see if we might be able to raise or lower it to enhance the contributions of STARZ to our revenues.
(Hint: Estimate the demand curve to get the slope and find the price elasticity of demand for all prices, and tell me where price is elastic and where price is inelastic and explain the connection of elasticity with revenues.)
The regression you did was wrong. The ...
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