-
Consider a cereal manufacturer with two types of customer. Type 1 individuals have reservation price $4, and using a coupon costs them $1.25 (in terms of effort/time). Type 2 individuals have reservation price $3, and using a coupon does not cost them anything. It costs the manufacturer
$2.50 to produce each box of cereal.
-
What price should the manufacturer charge the type 1’s? How large a discount could the coupons offer without tempting the type 1’s to use them?
-
At the above price, how large a discount would the coupons have to offer to induce the type 2’s to buy cereal?
-
What price and coupon discount should the manufacturer set? Calculate the profits he receives from each group. Would he still offer coupons if the manufacturing cost suddenly rose to $3?
