Question

Why is the best price to charge for the unsold trees the one at which the price elasticity of demand equals -1? (Assume no disposal costs.)

The Fallacy of Using Historic Costs Or there's no point crying over spilt milk 'What's done is done.\" 'Write it off to experience.' 'You might as well make the best of a bad j ob.' These familiar sayings are all everyday examples of a simple fact of life: once something has happened, you cannot change the past. You have to take things as they are now. If you fall over and break your leg, there is little point in saying, 'If only I hadn't done that, 1 could have gone on that skiing holiday; I could have taken part in that race, I could have done so many other things (sigh).' Wishing things were different won't change history. You have to manage as well as you can with your broken leg. It is the same for a firm. Once it has purchased some inputs, it is no good then wishing it hadn't. It has to accept that it has now got them and make the best decisions about what to do with them. Take a simple example. The local greengrocer in early December decides to buy 100 Christmas trees for 20 each. At the time of purchase, this represents an opportunity cost of 20 each, since the 20 could have been spent on something else. The greengrocer estimates that there is enough local demand to sell all 100 trees at 30 each, thereby making a reasonable prot (even after allowing for handling costs). But the estimate turns out to be wrong. On 23 December there are still 50 trees unsold. What should be done? At this stage the 20 that was paid for the trees is irrelevant. It is a historic cost. It cannot be recouped: the trees cannot be sold back to the wholesaler! In fact, the opportunity cost is now zero. It might even be negative if the greengrocer has to pay to dispose of any unsold trees. It might, therefore, be worth selling the trees at 20, 10 or even l. Last thing on Christmas Eve it might even be worth giving away any unsold trees. Question Why is the best price to charge for the unsold trees the one at which the price elasticity of demand equals l'.-' {Assume no disposal costs.)