The Economists’ Approach to Pricing [LO1]
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 $1.89 and 1,500 cones were sold. During the second week, she priced the cones at $1.49 and 2,340 cones were sold. The variable cost of a cone is $0.43 and consists solely of the costs of the ice cream and of the cone itself. The fixed expenses of the ice cream stand are $675 per week.
1. Did Maria make more money selling the cones for $1.89 or for $1.49?
2. Estimate the price elasticity of demand for the ice cream cones.
3. Estimate the profit-maximizing price for ice cream cones.