During 1993, the Japanese yen appreciated by 11% against the dollar. In response to the lower cost of its main imported ingredientsĂ˘â‚¬â€ťbeef, cheese, potatoes, and wheat for burger bunsĂ˘â‚¬â€ťMcDonaldĂ˘â‚¬â„˘s Japanese affiliate reduced the price on certain set menus. For example, a cheeseburger, soda, and small order of french fries were marked down to Ă‚ÂĄ410 from Ă‚ÂĄ530. Suppose the higher yen lowered the cost of ingredients for this meal by Ă‚ÂĄ30.
a. How much of a volume increase is necessary to justify the price cut from Ă‚ÂĄ530 to Ă‚ÂĄ410? Assume that the previous profit margin (contribution to overhead) for this meal was Ă‚ÂĄ220. What is the implied price elasticity of demand associated with this necessary rise in demand?
b. Suppose sales volume of this meal rises by 60%. What will be the percentage change in McDonaldĂ˘â‚¬â„˘s dollar profit from this meal?
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c. What other reasons might McDonaldĂ˘â‚¬â„˘s have had for cutting price besides raising its profits?