In March 2010, Mc Donald’s Corp. announced a policy

| March 14, 2016

In March 2010, Mc Donald’s Corp. announced a
policy to increase summer sales by selling all soft
drinks, no matter the size, for $1.00. The policy
would run for 150 days starting after Memorial
Day. The $1.00 drink prices were a discount from
the suggested price of $1.39 for a large soda. Some
franchisees worried that discounting drinks,
whose sales compensate for discounts on other
products, could hurt overall profits, especially
if customers bought other items from the Dollar
Menu. McDonald’s managers expected this pro-
motion would draw customers from other fast-
food chains and from convenience stores such as
7-Eleven. Additional customers would also help
McDonald’s push its new beverage lineup that in-
cluded smoothies and frappes. Discounted drinks did cut into McDonald’s coffee sales in previous
years as some customers chose the drinks rather
than pricier espresso beverages. Other chains with
new drink offerings, such as Burger King and Taco
Bell, could face pressure from the $1.00 drinks at
McDonald’s.47

a. Given the change in price for a large soda
from $1.39 to $1.00, how much would quantity
demanded have to increase for McDonald’s rev-
enues to increase? (Use the arc elasticity for-
mula for any percentage change calculations.)

b. What is the sign of the implied cross-price elas-
ticity with drinks from McDonald’s competitors?

c. What are the other benefits and costs to
McDonald’s of this discount drink policy?

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