Why do small convenience stores which are often open 24-7 typically charge higher prices than supermarkets? b. Why are designer label jeans typically more expensive than 'mass-market' jeans
Why do small convenience stores which are often open 24-7 typically charge higher prices than supermarkets? b. Why are designer label jeans typically more expensive than 'mass-market' jeans
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Refer to Example 10.3 - 'Markup Pricing: Supermarkets to Designer Jeans'
a. Why do small convenience stores which are often open 24-7 typically charge higher
b. Why are designer label jeans typically more expensive than 'mass-market' jeans?
Transcribed Image Text:EXAMPLE 10.3
MARKUP PRICING: SUPERMARKETS TO
DESIGNER JEANS
Although the elasticity of market demand for food is
small (about -1), no single supermarket can raise its
prices very much without losing customers to other
stores.
The elasticity of demand for any one supermarket is
often as large as -10. We find P = MC/(1 - 0.1) =
MC/(0.9) = (1.11)MC.
%3D
The manager of a typical supermarket should set prices about 11 percent
above marginal cost.
Small convenience stores typically charge higher prices because its customers
are generally less price sensitive.
Because the elasticity of demand for a convenience store is about -5, the
markup equation implies that its prices should be about 25 percent above
marginal cost.
With designer jeans, demand elasticities in the range of -2 to -3 are typical.
This means that price should be 50 to 100 percent higher than marginal cost.
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