PROBLEM A–4 The Economists’ Approach to Pricing [LO1]
The postal service of St. Lucia, an island in the West Indies, obtains a significant portion of its revenues from sales of special souvenir sheets to stamp collectors. The souvenir sheets usually contain several high-value St. Lucia stamps depicting a common theme, such as the anniversary of Princess Diana’s funeral. The souvenir sheets are designed and printed for the postal service by Imperial Printing, a stamp agency service company in the United Kingdom. The souvenir sheets cost the postal service $0.60 each. (The currency in St. Lucia is the East Caribbean dollar.) St. Lucia has been selling these souvenir sheets for $5.00 each and ordinarily sells 50,000 units. To test the market, the postal service recently priced a new souvenir sheet at $6.00 and sales dropped to 40,000 units.
1. Does the postal service of St. Lucia make more money selling souvenir sheets for $5.00 each or $6.00 each?
2. Estimate the price elasticity of demand for the souvenir sheets.
3. Estimate the profit-maximizing price for souvenir sheets.
4. If Imperial Printing increases the price it charges to the St. Lucia postal service for souvenir sheets to $0.70 each, how much should the St. Lucia postal service charge its customers for the souvenir sheets?
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