How do you know that cutting price of Roundup was a good idea for Monsanto?
One of the factors for Roundup’s success is because of the increasing popularity of conservation tillage. But as the conservation tillage is sensitive to the price of herbicides, the price of herbicides is very elastic. Therefore, the demand for herbicide will respond substantially to changes in the price. For Roundup, when its price was reduced by 9%, the sales volume was increased by 22%. 22% is much higher than 9%. As a result, the price of Roundup is very elastic and the cutting price of Roundup will increase much more sales volume. In addition, Monsanto can exploit economies of scale, the cost will not be very high. As the percentage increased of sales volume is much higher than the percentage reduced of price, its profits were also increased a lot. As a result, cutting the price of Roundup was a good idea for Monsanto.
How might you estimate the elasticity of demand and the profit-maximization price for 1995. Do you think Monsanto set the right price?
To estimate the elasticity of demand, the percentage change in quantity demanded in response to the percentage change in price needed to be calculated. e=(% change in quantity demended)/(% change in price)
According to Exhibits 1 and 2, the domestic and international prices and volumes of Roundup in 1995 and 1996 are listed below:
The domestic elasticity of demand is (|15-13|/((15+13)/2))/(|44-45|/((45+44)/2))=6.36 The international elasticity of demand is (|30-25|/((30+25)/2))/(|20-21|/((20+21)/2))=3.72 To estimate the profit-maximization price, the marginal cost needs to be equal to the marginal revenue. When (p-MC)/p=1/|e| , the profits are maximized. But as the marginal cost was not mentioned in the case, the profit-maximization price cannot be calculated. However, between...
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