Answered: Mr. Salman Saleem is doing a business…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter23: Managing Vertical Relationships

Section: Chapter Questions

Problem 1MC

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Mr. Salman Saleem is doing a business of Dairy Products in Karachi. His main products are Milk,

Yogurt and Eggs. Last month he has sold around 8000 KG of Milk, 5000 KG of Yogurt and 3000 Dozens of Eggs. The average current market price of the Milk is Rs.120/KG; the Yogurt is 200/KG; and the Eggs is Rs.160/Dozen.

In order to increase revenue, Mr. Salman is planning to change the pricing strategy for some or all of the products but he is confused and looking for an expert advice. Market research has suggested that the price elasticity of demand for each product is:

Milk: (-) 1.0; Yogurt: (-) 1.5; Eggs: (-) 0.5

Being an expert of the subject, you are required to calculate, evaluate and suggest the planned price change on following situations.

Would a 5% price increase have been better for some or all of the products?
Would a 5% price reduction have been better for some or all of the products?
Should the company retain their current market price? If yes then why? If not then why not?
How Mr. Salman Saleem can maximize their revenue?

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