Suppose that Hallmark Cards wishes to know the price elasticity of demand faced

Question

Suppose that Hallmark Cards wishes to know the price elasticity of demand faced by its arch-rival, American Greetings, and has hired you to estimate it. Hallmark provides you with an educated guess concerning the marginal cost of producing a greeting card, which they estimate to be constant and equal to $1.22. A quick trip to the store tells you that American Greetings is selling its cards for an average of $3.25. Using these numbers, and assuming that American Greetings is maximizing its profit, calculate the price elasticity of demand faced by American Greetings. a 0.73 b 0.60 c 1.60 Suppose that Hallmark Cards wishes to know the price elasticity of demand faced by its arch-rival, American Greetings, and has hired you to estimate it. Hallmark provides you with an educated guess concerning the marginal cost of producing a greeting card, which they estimate to be constant and equal to $1.22. A quick trip to the store tells you that American Greetings is selling its cards for an average of $3.25. Using these numbers, and assuming that American Greetings is maximizing its profit, calculate the price elasticity of demand faced by American Greetings. a 0.73 b 0.60 c 1.60

Explanation / Answer

Answer b. -0.60

the price elasticity of demand will always be a negative number because of the inverse relationship between price and quantity demanded. As price went up, quantity demand goes down, or vice versa. When price goes down, quantity demand goes up. Price and quantity demanded always move in opposite directions, hence the price elasticity of demand is always negative

Avg. Price Marginal Cost Operating margin Price elasticity 3.25 1.22 -2.03 -0.6

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