P7–8 Economists’ approach to pricing Time allowed: 30 minutes The postal service of St Vincent, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high-value St Vincent stamps depicting a common theme, such as the life of Princess Diana. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a stamp agency service company in the United Kingdom.

The souvenir sheets cost the postal service $0.80 each. (The currency in St Vincent is the East Caribbean dollar.) St Vincent has been selling these souvenir sheets for $7.00 each and ordinarily sells about 100,000 units. To test the market, the postal service recently priced a new souvenir sheet at

$8.00 and sales dropped to 85,000 units.

Required 1 Does the postal service of St Vincent make more money selling souvenir sheets for $7.00 each or $8.00 each?
2 Estimate the price elasticity of demand for the souvenir sheets.
3 Estimate the profit-maximizing price for souvenir sheets.
4 If Imperial Printing increases the price it charges to the St Vincent postal service for souvenir sheets to $1.00 each, how much should the St Vincent postal service charge its customers for the souvenir sheets?