I don’t know how to handle this Marketing question and need guidance.
JUST-NOTICEABLE DIFFERENCES (j.n.d.) AND WEBER’S LAW
Weber’s Law states that for a change in the stimulus to be noticed, the change has to be a constant fraction of the existing stimulus. That is, if the existing stimulus is S, then the change, Ds, should be a constant fraction, k, such that:
Ds / S = k
Take the perspective of a marketing manager who faces increasing raw material costs to produce Tortilla Chips. An increase in the cost of the raw materials has increased the cost of manufacturing the chips by 15%. You wish to maintain the current level of profit on the chips.
You face two choices:
you can either increase the price of the bag of chips while keeping the size of the bag constant, or
you can decrease the amount of chips in the bag while keeping the price constant.
You ideally want to make a change that is less than the just-noticeable threshold of the consumer (i.e., pass the cost increase on to the consumers without them noticing it).
For the purpose of this exercise, assume that:
you can take 1-ounce out of a 5-ounce package before consumers notice the difference,
you can increase prices by 5 cents over the original price of a $1.00 before consumers notice
you need to increase prices by 15% to pass on the entire cost increase.
1. Calculate the constant of proportionality for the j.n.d for quantity (kq) and price (kp) (what is the maximum % increase or decrease before consumers will notice).
2. How much do you need to reduce your quantity by so that your package price remains unchanged? Hint: you need to think about it in terms of price per ounce ($/oz.).
3. On the basis of this calculation, what would you choose to do – increase prices, or reduce quantity? Why?