Exercise A-1 The Economists Approach to Pricing [LOA-1]

Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. Her store caters primarily to tourists passing through town on their way to Yellowstone National Park.

Maria is unsure of how she should price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $1.80 and 920 cones were sold. During the second week, she priced the cones at $1.50 and 1,380 cones were sold. The variable cost of a cone is $.40 and consists solely of the costs of the ice cream and of the cone itself. The fixed expenses of the ice cream stand are $468 per week.

Required:

1-a.

Calculate the net operating income for sale price of $1.80 and $1.50? (Round your answers to 2 decimal places.)

1-b.

Did Maria make more money selling the cones for $1.80 or for $1.50?

$1.80 $1.50

2.

Estimate the price elasticity of demand for the ice cream cones.(Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)

3.

Estimate the profit-maximizing price for ice cream cones. (Do not round intermediate calculations. Round your answer to 2 decimal places.)