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Enchantment Cosmetics, Inc., offers a line of cosmetic and perfume products marketed through leading department stores. Product manager Erica Kane recently raised the suggested retail price on a popular line of mascara products from $9 to $12 following increases in the costs of labor and materials. Unfortunately, sales dropped sharply from 16,200 to 9,000 units per month. In an effort to regain lost sales, Enchantment ran a coupon promotion featuring $5 off the new regular price. Coupon printing and distribution costs totaled $500 per month and represented a substantial increase over the typical advertising budget of $3,250 per month. Despite these added costs, the promotion was judged to be a success, as it proved to be highly popular with consumers. In the period prior to expiration, coupons were used on 40 percent of all purchases and monthly sales rose to 15,000 units.
- Calculate the arc price elasticity implied by the initial response to the Enchantment price increase.
- Calculate the effective price reduction resulting from the coupon promotion.
- In light of the price reduction associated with the coupon promotion and assuming nochange in the price elasticity of demand, calculate Enchantment’s arc advertising elasticity.
- Why might the true arc advertising elasticity differ from that calculated in part C?
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