Calloway Shirt Manufacturers sells knit shirts in two sub-markets. In one sub-market, the shirts carry Calloway’s popular label and breast logo and receive a substantial price premium. The other sub-market is targeted toward more price conscious consumers who buy the shirts without a breast logo, and the shirts are labelled with the name Archwood. The retail price of the shirts carrying the Calloway label is R420 while the Archwood shirts sell for R250. Calloway’s market research indicates a price elasticity of demand for the higher priced shirt of -2.0, and the elasticity of demand for the Archwood shirts is -4.0. Moreover, the research suggests that both elasticities are constant over broad ranges of output. a. Are Calloway’s current prices optimal? b. Management considers the R250 price to be optimal and necessary to meet the competition. What price should the firm set for the Calloway label to achieve an optimal price ratio?
Calloway Shirt Manufacturers sells knit shirts in two sub-markets. In one sub-market, the
shirts carry Calloway’s popular label and breast logo and receive a substantial
The other sub-market is targeted toward more price conscious consumers who buy the shirts
without a breast logo, and the shirts are labelled with the name Archwood. The retail price of
the shirts carrying the Calloway label is R420 while the Archwood shirts sell for R250.
Calloway’s
of -2.0, and the elasticity of demand for the Archwood shirts is -4.0. Moreover, the research
suggests that both elasticities are constant over broad ranges of output.
a. Are Calloway’s current prices optimal?
b. Management considers the R250 price to be optimal and necessary to meet the
competition. What price should the firm set for the Calloway label to achieve an optimal
price ratio?
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