Exercise 2.

10 Elasticity of Demand and Market Structure

Janet Gordon and Phil Hopkins

Required:

1. Is the demand for pizza relatively more elastic or inelastic?

 The demand for pizza is relatively more elastic because the quantity demanded
changes if there is a change in the price. We can clearly see in the trend that the
pizza with a lower price recorded the highest sales, while the most expensive
one has garnered the least number of quantity sold.

2.

 The market structure that characterizes the pizza industry is monopolistic

competition. I suppose that Mama Mia’s pizza can charge so much more per
pizza than Fast Freddy does because its average prices for pizza is much higher
than Fast Freddy’s, which means it has greater quality. The quantity sold could
still be the same if Mama Mia will charge a higher price because it is already
known to sell good quality pizzas than Fast Freddy.

Exercise 2.13 Markup on Cost, Cost-Based Pricing

Arthur Quillen Construction Company

Required:

1. Markup on Total Direct Costs = Overhead and profit / (Direct material + Direct labor
+ Subcontractors)
Markup on Total Direct Costs = $1,140,000 / ($2,250,000 + 1,900,000 + 3,450,000)
Markup on Total Direct Costs = $1,140,000 / $7,600,000
Markup on Total Direct Costs = 0.15 or 15%

2. Bid = $570,000 x 1.15

Bid = $655,500

 If a customer would complain about having a pretty high profit, Quillen might
counter it by stating that there is a constant markup percentage that the company
is using to determine every bid. Thus, their profit is only justifiable.