### Pricing Strategy and Elasticity of Demand in the Greeting Cards Market#### Setting Prices Using the Lerner IndexSuppose that econometricians at Hallmark Cards determine that the price elasticity of demand for greeting cards is -2. **a. Determining Optimal Pricing for Hallmark Cards**If Hallmark’s marginal cost of producing cards is constant and equal to $1.00, we can use the Lerner index to determine what price Hallmark should charge to maximize profit.**Lerner Index Formula:**\[ \text{Lerner Index} = \frac{P - MC}{P} = \frac{1}{|E|} \]Where:- $ P $ is the price- $ MC $ is the marginal cost- $ E $ is the price elasticity of demandGiven:- $ E = -2 $ (Price Elasticity of Demand)- $ MC = \$1.00 $We rearrange the formula to solve for $ P $:\[ \frac{P - 1.00}{P} = \frac{1}{2} \]Solving for $ P $:\[ P - 1.00 = \frac{P}{2} \]\[ 2(P - 1.00) = P \]\[ 2P - 2.00 = P \]\[ 2P - P = 2.00 \]\[ P = 2.00 \]Therefore, Hallmark should charge a price of $2.00 per greeting card to maximize profit.#### Estimating Price Elasticity for American Greetings**b. Estimating Price Elasticity for American Greetings**Hallmark hires you to estimate the price elasticity of demand faced by its archival, American Greetings. Hallmark estimates that American’s marginal cost of producing a greeting card is $1.22. You note that American’s cards sell for an average of $3.25. Assuming that American Greetings is maximizing profit, calculate their price elasticity of demand.Using the Lerner Index formula:\[ \text{Lerner Index} = \frac{P - MC}{P} = \frac{1}{|E|} \]Given:- $ MC = \$1.22 $- $ P = \$3.25 $\[ \frac{3.25 - 1.22}{3.25} = \frac{1

Price elasticity of demand shows how much the quantity demanded of a good responded to the change in…

Suppose that econometricians at Hallmark Cards determine that the price elasticity of demand for greeting cards is -2. a. If Hallmark's marginal cost of producing cards is constant and equal to $1.00, use the Lerner index to determine what price Hallmark should charge to maximize profit. b. Hallmark hires you to estimate the price elasticity of demand faced by its archrival, American Greetings. Hallmark estimates that American's marginal cost of producing a greeting card is $1.22. You note that American's cards sell for an average of $3.25. Assuming that American Greetings is maximizing profit, calculate their price elasticity of demand.

Suppose that econometricians at Hallmark Cards determine that the price elasticity of demand for greeting cards is -2. a. If Hallmark's marginal cost of producing cards is constant and equal to $1.00, use the Lerner index to determine what price Hallmark should charge to maximize profit. b. Hallmark hires you to estimate the price elasticity of demand faced by its archrival, American Greetings. Hallmark estimates that American's marginal cost of producing a greeting card is $1.22. You note that American's cards sell for an average of $3.25. Assuming that American Greetings is maximizing profit, calculate their price elasticity of demand.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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