Question

ohnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.2. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users? A. The optimal strategy is to charge the same price to both groups. B. 25% off C. 50% off D. 75% off

Answer 1

Correct option is option (C)

Option (C) : 50%

First, we have to calculate marginal cost (MC) for coupon users.

Given,

Price of detergent (P) = $10 per unit box

Elasticity of demand for coupon users (E) = -3

Now, from the formula :

P = MC × (E/E+1)

Then, MC = P/(E/E+1) ........ (1)

Putting the values of P and E in equation (1), we get :

MC = 10/(-3/-3+1)

MC = 10/(-3/-2)

MC = 10/1.5

MC = 6.67

Now,

Discount = Price - Marginal Cost

Discount = 10 - 6.67

Discount = 3.33 per box

Optimal discount to provide for Coupon users =

(Discount/Marginal Cost) × 100

= (3.33/6.67) × 100

= 50% Ans.