For several years, a large U.S. gift retailer has been purchasing a pen-and-pencil set from an overseas manufacturer for $27 per set. The retailer’s policy is to use a 120 percent markup on such stationery-related gifts. (a) Recently, a currency exchange-rate change has enabled the retailer to buy the pen-and-pencil set for only $21 per set. The retailer is considering passing along this cost decrease to his customers. If the retailer uses his usual markup for stationery-related gifts, calculate the new price the retailer would charge for this pen-and-pencil set. (b) A buyer in the retailer’s organization has taken the initiative to examine the historical data on this pen-and-pencil set. She obtained data for each of the past 18 years concerning the number of units sold during the year, the price during the year, and an index of economic activity in the retailer’s market area during the year, and then carried out a regression analysis on these data. The means for each variable and the regression coefficients from the analysis are as follows: Variable Mean Regression coefficient Number of units sold per year 3,103 Price during the year 52.06 23.85 Index of economic activity for the year 118.7 106.3 Calculate the price elasticity implied by these results. Show your work. (c) The buyer found it surprising that the regression coefficient of price had a positive sign. Describe the price-quality heuristic, and explain how it might account for this positive price coefficient. (d) Given the sign of the price elasticity you calculated in Part (b), should the retailer go ahead with decreasing the item’s price to the price that you calculated Part (a)? Justify your answer.
- For several years, a large U.S. gift retailer has been purchasing a pen-and-pencil set from an overseas manufacturer for $27 per set. The retailer’s policy is to use a 120 percent markup on such stationery-related gifts.
(a) Recently, a currency exchange-rate change has enabled the retailer to buy the pen-and-pencil set for only $21 per set. The retailer is considering passing along this cost decrease to his customers. If the retailer uses his usual markup for stationery-related gifts, calculate the new price the retailer would charge for this pen-and-pencil set.
(b) A buyer in the retailer’s organization has taken the initiative to examine the historical data on this pen-and-pencil set. She obtained data for each of the past 18 years concerning the number of units sold during the year, the price during the year, and an index of economic activity in the retailer’s market area during the year, and then carried out a regression analysis on these data. The means for each variable and the regression coefficients from the analysis are as follows:
|
Variable |
Mean |
Regression coefficient |
|
Number of units sold per year |
3,103 |
|
|
Price during the year |
52.06 |
23.85 |
|
Index of economic activity for the year |
118.7 |
106.3 |
Calculate the price elasticity implied by these results. Show your work.
(c) The buyer found it surprising that the regression coefficient of price had a positive sign. Describe the price-quality heuristic, and explain how it might account for this positive price coefficient.
(d) Given the sign of the price elasticity you calculated in Part (b), should the retailer go ahead with decreasing the item’s price to the price that you calculated Part (a)? Justify your answer.
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