Answered Essay: The Springvale Seaside owners see the change in profits from the price decrease

The Springvale Seaside owners see the change in profits from the price decrease in May and the projection for June. They decide to go back to a price of $81.00 and have sales of 35,000 boxes in June.   The May production required staff to work 2 weekends and there were many complaints. No one wanted to work weekends during vacation season in Maine and there was no room to expand production. The owners were willing to add a second location that would permit greater production if profits justified. They decide that they are only willing to manage enough production to support 35,000 deliveries at a price of $81.00. However, if they raised price to $90.00 per box for July, they would be willing to hire additional staff, lease more space across town and produce 58,000 boxes.

Calculate the Elasticity of Supply. Is it elastic or inelastic?

How many deliveries will Seaside have at a price of $90.00? Hint: since the product is perishable, you will only want to produce what customers will buy. Use the original elasticity of demand calculated in #1 above.

What will be the Revenue?

What will be the Profit?

Should Springvale Seaside raise the price to $90.00? Why or why not?

Expert Answer

Answer

Price Elasticity of Supply = Es = (ΔS/S) / (ΔP/P) = (ΔS / ΔP) x (P/S)

Es = (58000 – 35000)*81 / ((90 – 81)*35000) = 5.91.

The good is price elastic as the percentage change in supply is greater than the percentage change in price.

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For other parts, information of demand and cost must be given.

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