Calloway label to achieve an optimalprice ratio

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Reference no: EM131103619

Calloway Shirt Manufacturers sells knit shirts in two sub-markets. In one sub-market, the shirts carry Calloway's popular label and breast logo and receive asubstantial price premium. The other sub-market is targeted toward more priceconscious consumers who buy the shirts without a breast logo, and the shirts arelabeled with the name Archwood. The retail price of the shirts carrying theCalloway label is $42.00 while the Archwood shirts sell for $25. Calloway'smarket research indicates a price elasticity of demand for the higher priced shirtof -2.0, and the elasticity of demand for the Archwood shirts is -4.0. Moreover,the research suggests that both elasticities are constant over broad ranges ofoutput.

a. Are Calloway's current prices optimal?

b. Management considers the $25 price to be optimal and necessary to meet the competition. What price should the firm set for the Calloway label to achieve an optimalprice ratio?

Reference no: EM131103619

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