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    Nonprice Competition

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    General Cereals, Inc. (GCI) produces and markets Sweeties!, a popular ready to eat breakfast cereal. In an effort to expand sales in the Secaucus, New Jersey, market, the company is considering a 1 month promotion whereby GCI would distribute a coupon for a free daily pass to a local amusement park in exchange for three box tops, as sent in by retail customers. A 25% boost in demand is anticipated, even though only 15 percent of all eligible customers are expected to redeem their coupons. Each redeemed coupon costs GCI $6, so the expected cost of this promotion is .30$ (=0.15x$6/3) per unit sold. Other marginal costs for cereal production and distribution are constant at $1 per unit. Current demand and marginal revenue relations for Sweeties! are
    Q=16,000 - 2,000P
    MR=ATR/AQ=$8-$0.001Q (note...my font doesn't have the triangle symbol so I'm using A to represent it.)
    Demand and marginal revenue relations that reflect the expected 25% boost in demand for Sweeties! are the following:
    Q=20,000-2,500P
    MR=ATR/AQ=$8-$0.0008Q

    1. Calculate the profit-maximizing price/output and profit levels for Sweeties! prior to the coupon promotion.
    2. Calculate these same values subsequent to the Sweeties! coupon promotion and following the expected 25% boost in demand.

    © BrainMass Inc. brainmass.com October 9, 2019, 7:58 pm ad1c9bdddf
    https://brainmass.com/economics/pricing-output-decisions/nonprice-competition-134884

    Solution Preview

    Answer 1:
    Profit maximization always occurs when MR = MC
    Thus 8 - .001Q = ...

    Solution Summary

    The solution answers the questions below in detail.

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