Question 2 Impact of price reduction on revenue

A hardware store in a regional city is well known for its range of gardening tools and building supplies - particularly timber. One year, there is an over-supply of timber, which means that the hardware store must reduce the price of its timber to clear excess stock. For a limited time, the hardware store manager decides to have a timber sale, during which GST of 10% does not apply.

Your task is to determine the consequences of the short-term removal of 10% GST.

The supply and demand equations are given by Demand Equation: = 175 15

Supply Equation: = 0.077² + 5.5 + 66

where q is the mass of timber (in hundreds of kilograms) ; p is the price of timber in dollars. a and b are coefficients to be chosen below.

Steps to complete to undertake the investigation

1. Obtain two random numbers for a and b between 0.1 and 0.9 inclusive. Use the Excel random function =Rand() or the RANDOM key on your calculator.

2. Find the equilibrium price and quantity algebraically, without the price decrease.

3. Update the supply equation to include the removal of 10% GST.

4. Use algebra to find the new equilibrium price and quantity.

5. Use Excel to graph on the same set of axes, the original supply and demand equations (from part 1) and the updated supply equation with the proposed price decrease (part 3).

6. Use your results to complete the following summary table. Round answers to two decimal places, except for total revenue amounts which round to 0 decimal places

Before GST removal

After GST removal

Difference

Equilibrium quantity

Equilibrium price

Percentage of GST saving passed onto customers

Revenue hardware store receives

Revenue hardware store receives if it passes on ALL

of GST saving

LEAVE THIS CELL BLANK

7. Summarise your findings. In your conclusion:

a. Discuss the effect of the removal of the GST on price, quantity and revenue

b. Comment on how much of the GST saving the hardware store is passing onto its customers, why this might be so; and, how revenue might differ if the store passed on all of the saving.

c. Note any assumptions you have made and any limitations of your findings.