Listen, elasticity is
important,” said the director of the aquarium, “but we borrowed $21.6 million
(for 20 years, other fixed costs are $10,000 per month; total fixed costs per
month are $100,000) to build the aquarium last year. We need to set a price of
$16 to be able to pay our debt since variable costs are four dollars per
person, and we use a standard markup of 300% of variable costs (current price
is $12). I’ve already reduced my promotion budget to pay the debt. If last
month’s attendance is any indication (only 10,000 customers), we will have to
raise prices and maybe eliminate promotion. We can estimate elasticity when the
debt is paid, although I don’t think it is important since we are the only
aquarium within 150 miles. Furthermore, there are 4,000,000 people in the
metropolitan area. If 50% of them visited the aquarium once (at $16 per
person), we could pay off our debt immediately.”
Do you agree or disagree with the director’s approach? Explain.
Note: The aquarium is open 30 days per month, eight hours per day. Do not limit
your answer to price alone.