During 1993, the Japanese yen appreciated by 11% against the dollar. In response to the lower cost of its main imported ingredientsâ€”beef, cheese, potatoes, and wheat for burger bunsâ€”McDonaldâ€™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 Â¥410 from Â¥530. Suppose the higher yen lowered the cost of ingredients for this meal by Â¥30.
a. How much of a volume increase is necessary to justify the price cut from Â¥530 to Â¥410? Assume that the previous profit margin (contribution to overhead) for this meal was Â¥220. 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 McDonaldâ€™s dollar profit from this meal?
c. What other reasons might McDonaldâ€™s have had for cutting price besides raising its profits?