PT8 S1 Q09

clayburdelik

Easy to get down to D & E.

The final decision is just that complaints happen when they are rising and that is different than when they're at their highest?
And furthermore that margins are at their greatest when prices drop. Meaning there is lag in the price drop to consumers?

mamraj.mahboob

Hi Clayburdelik,

From the stimulus:
1) Complaints rise when bottled-milk price rises.
2) Price increase of bottle-milk often reflects price increase of raw milk.
3) When raw milk price is rising, the bottlers mark up is lowest.
4) when raw milk price is falling, the bottlers mark up is greatest.

E says -> Customers complain more when dairy farmers earn their smallest profits.
One issue is, we don't know anything about dairy farmers. The stimulus only talks about bottlers. So at this point you can strike this answer out. The other issue is 'profits'. All we know from the stimulus is the relation between raw milk and selling price. We don't know anything about the other expenses (variable/fixed) that may affect profit margins.

D says -> Bottlers do not proportionally decrease their selling price when the raw milk price drops. This has to be true from the "4)" from the stimulus. i.e. When the raw milk price is falling, the only way the mark up remains the "great" is if the selling price remains the same, increases, or decreases with a smaller margin than the raw-milk price. [This is exactly the point you mentioned, there's a 'lag' between raw milk price dropping & bottled milk selling price dropping.

Let me know if this makes sense