Optimal Markup on Price
TLC Lawncare, Inc., provides fertilizer and weed control lawn services to residential customers. Its seasonal service package, regularly priced at $250, includes several chemical spray treatments. As part of an effort to expand its customer base, TLC offered $50 off its regular price to customers in the Dallas area. Response was enthusiastic, with sales rising to 5,750 units (packages) from the 3,250 units sold in the same period last year.
A. Calculate the arc price elasticity of demand for TLC service.
B. Assume that the arc price elasticity (from part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $135 per unit for labor and materials, calculate TLC's optimal markup on price and its optimal price.