3.Suppose that you are the owner of a brand of energy drink, called ACTIVE (which competes with
as Red Bull, Monster etc.). Suppose that the price elasticity of ACTIVE is -3.5 (as
revealed by the analysis of historical data on sales and prices of ACTIVE over the past 2 years).
a. You are contemplating a price cut of 25 % on ACTIVE. What is the minimum profit
margin on ACTIVE at which this price cut will be profitable?
b. Assume that ACTIVE's profit margin is equal to the minimum profit margin calculated
under question 3 (a). What is the maximum percentage price cut that you can offer on
ACTIVE without decreasing your profit?
c. Suppose it costs $1 to produce a can of ACTIVE. What is the optimal price that you must
charge for ACTIVE per can?
d. Suppose that you introduce a second brand of energy drink, called HIGH ENERGY. Now,
you own a portfolio of two brands, ACTIVE and HIGH ENERGY. In this scenario, will you
find it optimal to maintain the price of ACTIVE at the optimal price calculated under
question 3 (c), or increase it or decrease it? Why? Explain the rationale for your answer
(no calculations are necessary).
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