Price Elasticity

question 32

Essay

Price Elasticity. Z-Best Pizza recently decided to raise its regular price on medium pizzas from $9 to $12 following increases in the costs of labor and materials. Unfortunately, sales dropped sharply from 8,100 to 4,500 pizzas per month. In an effort to regain lost sales, Z-Best ran a coupon promotion featuring $5 off the new regular price. Coupon printing and distribution costs totaled $100, and caused only a modest increase in the typical advertising budget of $2,400 per month. The promotion was judged a success as it proved highly popular with consumers. In the period prior to expiration, coupons were used on 40% of all purchases and monthly sales rose to 7,500 pizzas.
A. Calculate the arc price elasticity implied by the initial response to Z-Best's price increase.
B. Calculate the effective price reduction resulting from the coupon promotion.
C. In light of this price reduction, and assuming no change in the price elasticity of demand, calculate Z-Best's arc advertising elasticity.
D. Why might the true arc advertising elasticity differ from that calculated in Part C?

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Definitions:

Compensation

Payment or remuneration given to someone in exchange for loss, damage, or suffering.

Partial Performance

Completion of only part of the obligations specified in a contract, which may affect the enforceability or terms of the contract.

Lost Profits

Financial gains that were expected but not realized due to the wrongful acts of another party.

Breach of Contract

The failure to fulfill the terms agreed upon in a contract, whether by not performing duties, providing defective goods, or any other non-compliance.