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