Violation of the law of one price.

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Chapter 16, Problem 16.1.2RQ

To determine

Violation of the law of one price.

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Suppose Meow Meow is a local store specializes in selling cat food. She offers discount coupons via Buzz, a free local newspaper. As such, some of her customers use the discount coupons while others do not. a. Printing and distributing the discount coupons are costly. Why does Meow Meow offer these coupons? Given that the coupons can be collected for free, why doesn’t she simply lower the price and save the costs of issuing the coupons? Briefly explain with reference to the concept of demand elasticity. b. Suppose Meow Meow has a constant marginal cost of $20 for her cat food. Based on your answer in (a), construct side-by-side diagrams to illustrate the pricing strategy adopted by Meow Meow on the coupon users and nonusers. Label your diagrams clearly. c. Explain TWO practical limitations facing Meow Meow when conducting the above pricing strategy. d. Instead of the above pricing strategy, one economist suggests Meow Meow using a two-part tariff. Briefly illustrate how this works.