Chapter Three Required Question Q3R. An online bookseller wants to increase its
ID: 1154227 • Letter: C
Question
Chapter Three Required Question Q3R. An online bookseller wants to increase its total revenue. One strategy the marketing director has proposed is to offer a 10% discount to customers on every book sold online. The online retailer has divided its customer base into two groups according to their likely responses to the discount offer. The table below provides market driven data on the two groups: Sales volume before discount Sales volume after discount Group A 1.55 1.65 Group B 1.5 1.7 Note: Sales are in millions per week ssuming the online retailers' data is reflective of their customer base and the retailer know vhich group each customer belongs to when they log onto their website and can choose whi group to offer the discount too. Should the retailer offer a discount to a group, if so which gro nd why based on computing the elasticity of demand for both groups? (2 points)Explanation / Answer
Elasticity of demand refers to the degree of change in quantity demanded of a particular commodity due to change in price of the product itself, holding other things such as taste and preference, government policy etc constant. As per the law of demand the quantity demanded of a particular product goes up with a decrease in its price. The elasticity however captures this rate of change.
Formula wise, elasticity= percentage change in quantity of product demanded/ percentage change in the price of the product
Here, percentage change in the price of the product is given as 10%.
In case of group A, the percentage change in quantity demanded =((1.65-1.55)/1.55)*100=6.45%
therefore elasticity in this case=6.45%/10%=0.645
In case of group B, the percentage change in quantity demanded =((1.7-1.5)/1.5)*100=13.33%
therefore elasticity in this case=13.33%/10%=1.33
Since, the elasticity of demand is higher for group B(1.33>0.645) the retailer will offer a discount to group B as the demand of books will shoot up higher in case of group B as compared to group A if the same discount rate is offered to both the groups.This will increase his total revenue and solvethe purpose of offering discount.
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