Part 1 Harry and Garry are twin brothers, and they each own appliance stores. Ha
ID: 2341254 • Letter: P
Question
Part 1 Harry and Garry are twin brothers, and they each own appliance stores. Harry lives in Charleston, South Carolina and Garry lives in Gainesville, Florida. Even though they live far apart, they talk often, and trade hints and grievances about the appliance retail business. Lately, they have been discussing the fact that in a tough economy consumers often hold off on the upgrade of an appliance as long as possible, deciding that they will wait to "trade up" when economy turns around or the appliance breaks, whichever comes first. The brothers are discussing the wisdom of instituting short-term rebates in order to make their appliances more attractive to consumers, and to increase their rather dismal recent sales figures. Unbeknownst to each other, both Harry and Garry decide to institute a retail-level rebate on a specific high-end stove. The price of the stove in both stores is $1,000, and both Harry and Garry's rebate offers will be advertised in the Sunday paper, and will last one week. Neither Harry nor Garry has done the research necessary to discover the Just Noticeable Difference (which, for the target market and that product category in that economic climate, is 15%). Harry offers consumers a S$100 rebate on the S1,000 stove. Garry offers consumers a $200 rebate on the S1,000 stove. Harry sells 20 stoves during the rebate period, which is about the same number that he sold the week just prior to the rebate offer. Garry sells 30 stoves during the rebate period, which is an increase of about 10 more than he sold the week just prior to the rebate offer. Did the fact that he didn't know the accurate Just Noticeable Difference cost Harry any Money? Yes/No (Circle one). If yes, how much? Did the fact that he didn't know the accurate Just Noticeable Difference cost Garry any Money? Yes/No (Circle one). If yes, how much'?Explanation / Answer
The Just Noticeable Difference(JND) is given to be 15%, ie, The amount of rebate required should be atleast 15% of the original price for the offer to be even noticeable.The rebate amount ought to have been $150 ($1000*15%) or more for it to have been effective
Using the demand equation,
Where P-Price of the product
a-Price at which demand would be nil
b-change in price/change in quantity
Q-quantity demanded at the given price
In Garry's case, when P=800, Q=30
Therefore substituting in b= change in price/ change in quantity
=(900-800)/(30-20)
=10
P=a-10Q
Now, substituting Harry's case,when P=900,Q=20
900=a-(10*20)
900+200=a
a=1100
Now,given that the JND is $150 rebate, the Selling price should be set at $850($1000-$150) or less
850 =1100-10Q
10Q=1100-850
Q=250/10=25 units of stove
Therefore the total sales revenue by offering a rebate of $150 would be $21250(25*$850)
HARRY'S CASE: Yes
Since Harry offered a rebate of $100-which is less than the JND of $150-consumers did not even notice the offer.He sold 20 stoves during this period, which is the roughly the same number he had sold last week, even without the rebate and earned a total of $18000 ($900*20 units).Had he known the accurate JND,he would've offered a rebate of $150 (or more) and the amountof money Harry lost is $3250($21250-$18000)
GARRY'S CASE: No
Garry offered a rebate of $200-which is more than the JND of $150-Consumers have defenitely noticed the offer and Garry's sales has gone up 10 stoves, compared to last week.Although Garry wasn't aware of the accurate JND, he still chose to offer an appropriate rebate which is higher than the JND.Because of that,even though he didn't know the JND, not only did it not cost him money, he was also able to sell more stoves and earn more.
P=a-bQ