In anticipation of the upcoming quarterly disclosure of profits, you prepare your Board of Directors for the challenge that cost-push inflation having on profits. Please make yourself CEO of only one of these hypothetical companies.
ig Time Entertainment – Big Time Entertainment is a nationwide firm providing movies, arcades and other entertainment venues such as bowling and roller skating. Our operations have been heavily impacted during the Covid-19 pandemic. On reopening we have been faced with a host of regulations that have greatly increased our cost of operation, everything to operating far below our optimal number of patron to higher cost for cleaning and other measure to protect the public and our employees. Price elasticity of demand is 1.6 and we are also face with competitors, online entertainment and gaming, that are not experiencing these cost pressures.
- Is the demand curve for your product relatively elastic, inelastic or unitary elastic? Demonstrate for your company’s product, by how much the quantity demanded will change if you pass on a 10% increase in cost. In other words, show your calculation of the percentage change in the quantity demanded given a 10% change in your price. You must provide a calculations showing the percentage change in quantity demanded.
- Given your company’s and price elasticity of demand and the industry supply/competitive environment you face prepare a statement for your board as to the potential impact on profits. Who will pay the larger share of the cost increases, your firm or your customers?