The Caribbean Breeze Problem ( Managerial Economics) - Essay Example

The Caribbean Breeze Problem (Managerial Economics) Grade 19th December Introduction Both ships (Caribbean Breeze and Holiday Queen) have the same numbers of crews, cabins and passengers’ capacity. They also have the same fixed payroll and maintenance costs per week. The cruises have a high demand during the winter and lowest demand in late spring season. The winter season records a price elasticity of -2 as summer records -4. In order to increase the price elasticity in spring, Holiday Queen began advertising.

40 % of the total number of customers comprises of retirees while the rest consists of newlyweds, families and children. The ships earn $100 per person from last minute passengers and $200 from other passengers in a week per person. They also earn $500 from a family of 4 members and $300 from a family with at least one grandparent. The ships offer the services to customers for 5 days and 6 nights. The total numbers of weeks in a year that the ships are expected to operate are 48. They take a break of two weeks for staff training and maintenance.

In addition, the effect of advisement wears out after one year to mark the beginning of another advertisement. Every additional customer increases the expenses by $50 daily. The effect of promotional advertisement is to increase the normal elasticity by 50 %, and the effect of lifestyle advertisement is to reduce elasticity by 10 %. On the side of expenses, the ships use $ 250,000 on fixed payroll and $ 500,000 on fixed financial, operational and maintenance costs. Optimal pricing This is a model that helps to maximize revenues using the historical elasticity levels.

In the case, we will analyze the price elasticity of demand to illustrate price optimization. 75 % of 2000 (passengers) = 1500 This means that 1500 passengers receive the offer in summer 25 % of 2000 (passengers) = 500 Only 500 customers receive the offer in winter. Elasticity of demand in summer = change in quantity / change in price 75 % / - 50 % = - 1.5 Elasticity of demand in winter = change in quantity / change in price 25 % / -50 % = - 0.5 Price elasticity of demand = ∂ Q / ∂ P * P / Q Where P is the price and Q is the quantity demanded Price elasticity of demand in summer (last minute passengers) = - 1.

5 * 100/1500 = - 0.1 Price elasticity of demand in summer (other passengers) = -1.5 * 200 / 1500 = - 0.2 Price elasticity of demand in winter (last minute passengers) = -0.5 * 100 / 500 = - 0.4 Price elasticity of demand in winter (other passengers) = -0.5* 200 / 500 = - 0.2 Average Price elasticity of demand in summer = 0.2 + 0.1 / 2 = 0.15 Average Price elasticity of demand in winter = 0.2 + 0.4 / 2 = 0.3 The below table shows the relationship between the historical and the expected Price elasticity of demand in both summer and winter Historical Price elasticity of demand Expected Price elasticity of demand summer winter summer winter 4 2 0.15 0.3 As a result of promotional advertisement, the normal elasticity will increase by half.

In summer, increase in normal elasticity will be; -4 * 150 / 100 = -6 Winter, -2 * 150 / 100 = -3 Holiday Queen has started advertising special deals for summer. The table below shows the expected change in elasticity of demand after the promotional advertisement of prices. Historical Price elasticity of demand Expected Price elasticity of demand summer winter summer winter 4 2 0.6 0.3 Conclusion From the information given, it is noted that, the price elasticity of demand is at a higher level from the early minute passengers as compared to last minute passengers in summer season.

In winter, the reverse happens where price elasticity of demand from last minute customers becomes more than the elasticity in early minute customers. The elasticity of demand is also likely to increase after promotional advertisement. This means that, increased advertisement increases the demand for the services. In addition, the higher the prices are reduced the higher the demand. More customers are expected by Holiday Queen after advertisement of special deals for customers. This will result to addition of expenses because each additional passenger increases the cost by 50 dollars per day.

There is a need of reviewing the current pricing structure of the Caribbean cruise due to the expected changes brought by the promotional advertisement. There is a wide gap between the increase in normal elasticity in summer and winter. Recommendation The current pricing structure should be revised if Holiday Queen continues to carry out the promotional advertisement and if they still use the travel agent. The travel agents need remuneration in order to bring more customers. More so, the customers must be given the offer in order to use the ships in winter.

If they do not revise it, they are likely to record reduced profits throughout the off- season. In order to increase the profit, the management should use bundling which will help increase the net revenue when demands are lower in off season. In off seasons, the demands are always negatively correlated and sometimes result to reduced price discrimination. Using bundling, the management will offer favorable prices to the passengers and this will lead to increased profits. The management should focus on the best customers if it wants to realize a good profit.

Use of the travel agents should be reduced because they are additional expenses to the cost of production (Dana, 2008). The management should be fully aware that, the higher the prices of the services, the lower the number of customers. They should aim at reducing the prices of the services during the off season in order to attract more passengers. This will increase the price elasticity and hence increased profit. Reducing the prices of the services in winter will shift to the price elasticity curve to the right.

This will increase the expected returns. GRAPHS Connection between the historical and the expected Price elasticity of demand in both summer and winter Elasticity of demand after the promotional advertisement of prices Reference Dana, C., (2008). Pricing and Advertising: Essays on the economics. Lehigh University. Pro Quest Publisher.