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# 1 Enchanted Cosmetics, Inc, offers a line of cosmetics and perfume products marketes throu leading department stores.

Product manager Erica kane recently raised the suggested retail price on a popular line of mascara products from \$9 to \$12 following increases in the costs of labar and materials. Unfortunatel, sales dropped sharly from 16,200 to 9,00 units per month. In am effort to regain lost sales. Enchantment ran a coupon promotion featuring \$ 5 off the new regular price. Coupon printing and distribution costs totaled \$500 per month and represented a substantial increase over the typical advertising budge of \$3,250 per month. Despite these added costs, the promotion was judged to be a succes as it proved to be highly popular with consumers. In the period prior to expiration, coupons were used on 40 percent of all purchases and monthly sales rose to 15,000 units.

A.

Ep=

.=

B.

P = .=

(-)\$5(0.4) (-)\$2

C.

Ep=

## 15,000-13,000 (x ) 3,750 + 3,250 3,750 - 3,250 (x ) 15,000 +13,000 1

D. The true arc advertisting elasticity uses coupon promotion that can indepen effect the price cut and increase in advertising. The calculated arc advertising e can be overstated to the extent that targeted price cuts have a bigger influence the quantity than similar price reductions.

ducts marketes through ed the suggested wing increases from 16,200 to 9,000 coupon promotion ion costs totaled cal advertising budget udged to be a success, o expiration, rose to 15,000 units.

## n that can independently d arc advertising elasticity a bigger influence on

2. Betsy cannot sleep at night unless she makes a list of things she needs to do the following day. Last night she wrote down the following: go to work, study for economics, go running, go to the m

Betsy chooses the activities that are the greatest net benefit. Betsy have to go to work to because it appears getting in shape means a lot to her. Betsy likes going to the mall becau satisfaction, and going out with Bob was something she look forward too.

Now if she had an economics test, Betsy would have made studying a priority, and going t and hanging out with Bob would have been postponed.

## he following o running, go to the mall to shop, and go out with Bob.

ve to go to work to survive, she also goes running g to the mall because it brings instant

## riority, and going to the mall

4. Rochester instrucments, Inc Operates in the highly competitive electronics industry. Prices for its RX2 control switches are stable at \$50 each. That means that P=MR=\$50 in this market. Engineering estimates indicates the relevant total and marginal cost are: TC= 78,000 + 18Q + 0.002Q MC=18 + 0.004Q MR= MC 50= 18+ 0.004Q 0.004Q= 32 Q=8,000 40=18+ .004Q 0.004Q = 22 Q=5,500

## =\$50 in this market.

SUV

Cotton

Wage Increase

A) Price of Gas demand Old New 1 4000 3 2500 5 2000 7 1500 9 1000

## As price of gas increase the demand for SUVs decr

B) No of Sheeps demand Old New demand 10000 1000 2000 8000 3000 4000 6000 5000 6000 4000 7000 8000 2000 9000 10000 A) Price of Gas demand Old New demand 11 100 130 13 -600 -460 C) As the labor cost for bulding new houses increase Demand Old Price New Price 25000 100 110 20000 90 100 17000 80 90 15000 70 80 13000 60 70 11000 50 60 9000 40 50

ew demand
4500 4000 3500 3000 2500 2000 1500 1000 500 0 1 2 3 4

ew demand

ew demand

## Old demand New demand

ding new houses increase the demand for new houses decrease. ew Price
30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 7 Demand Old Price Column C

## mand d Price lumn C

SUMMARY OUTPUT Regression Statistics Multiple R 0.99 R Square 0.98 Adjusted R Square 0.96 Standard Error 39.77 Observations 10 ANOVA df Regression Residual Total SS MS 3 392732.52 130910.84 6 9489.98 1581.66 9 402222.5 F Significance F 82.77 0

Coefficients Standard Error t Stat 1668.82 86.6 19.27 -2.87 0.23 -12.34 0.1 0.02 5.02 -1.83 0.57 -3.2

P-value 0 0 0 0.02

Lower 95% Upper 95% Lower 95.0% 1456.91 1880.73 1456.91 -3.44 -2.3 -3.44 0.05 0.14 0.05 -3.23 -0.43 -3.23

Q= 1668.822-2.87071+.096408-1.82974

## Upper 95.0% 1880.73 -2.3 0.14 -0.43

SUMMARY OUTPUT Regression Statistics Multiple R 0.87 R Square 0.75 Adjusted R Square 0.72 Standard Error 112.22 Observations 10 ANOVA df Regression Residual Total SS MS 1 301470.89 301470.89 8 100751.61 12593.95 9 402222.5 F Significance F 23.94 0

Intercept X Variable 1

Coefficients Standard Error t Stat 1631.47 243.97 6.69 -2.6 0.53 -4.89

P-value 0 0

## Lower 95.0% Upper 95.0% 1068.87 2194.07 -3.82 -1.37

5 Q 180 590 430 250 275 720 660 Q 664.29 719.46 P \$475 \$400 \$450 \$550 \$575 \$375 \$375 P \$425 \$417 Adv 1100 2400 1500 3100 3400 2200 1200 Adv 2385.71 2450 Dist. 120 65 50 75 45 20 50 Dist. 17.14 6.25 Future Forecast 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Future Forecast 0.00 0.00

Regression #2 is much stronger due to the effects of Advertising and distribution and the effect on pricing.

Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 MSE

Sales 283 288 336 388 406 412 416 435 428 435 462 452 474 476 497 487 523 528 532 552

MA2 283 283 288 336 388 406 412 416 435 428 435 462 452 474 476 497 487 523 528 532 524.33

SM 283 283 288 336 388 406 412 416 435 428 435 462 452 474 476 497 487 523 528 532 498.05
600 500 400 300 200 100 0
80 82 84 19 19 19 19 86

82

84

86

88

90

92

94

96

19

19

19

19

19

19

19

19

## he second year MA is closer to the original price.

19

98

Q 180 590 430 250 275 720 660 490 700 210

P1 475 400 450 550 575 375 375 450 400 500 452.78

P2 506 431 481 581 606 406 406 481 431 531

TR 85500 236000 193500 137500 158125 270000 247500 220500 280000 105000

px

*P

## 0.270 0.299 0.253 -0.478 0.863 0.000 0.480 0.417 0.086

410.86 427.72 401.35 202.94 2188.52 0.00 577.36 514.29 328.13 561.24 The optimal price is higher than the average

MC=300