You Own a Small Bookstore

question 8

Multiple Choice

You own a small bookstore. You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand. The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget. Your own price elasticity of demand is around -1.7, and your advertising elasticity of demand is around 0.05. How much should you mark-up your price over your marginal cost for your books?

• A)By approximately a factor of 0.41.
• B)By approximately a factor of 2.43.
• C)By approximately a factor of 37 percent.
• D)By approximately a factor of 70 percent.

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Definitions:

Capital Rationing

Occurs when investors or management place a constraint on the size of the firm’s capital budget during a particular period.

Accounting Rate of Return

A financial ratio that measures the profitability of an investment by dividing the average annual profit by the initial investment cost.

Weighted Average Cost of Capital

The average rate of return a company is expected to pay its security holders to finance its assets, weighted by the type of capital.

Modified Internal Rate of Return (MIRR)

A financial metric that accounts for the cost of capital and reinvestment of cash flows to provide a better measure of a project's profitability than the traditional IRR.