Reference no: EM131391848
A large multinational restaurant chain has introduced gourmet burgers in addition to the fast-food style hamburgers it has always sold. We consider here the actions of a single franchise’s store and its pricing policy.
The franchise manager estimates that daily demand for gourmet burgers is represented by
Q = 145.67 – 5.85P where:
P = price per gourmet burgers in dollars
Q = number of gourmet burgers sold per day.
Current average daily sales of gourmet burgers are 60.
a) What price is the cafe currently charging for gourmet burgers?
b) Since the introduction of the customising option, the local franchise has noticed that average daily sales of gourmet burgers increased from 56 to 60 and average daily sales of traditional fast-food burgers increased from 83 to 85. Over the same period, consumers’ incomes have risen by 6%. Specify and calculate the elasticities that the local franchise can use to explain the changes in sales. State any assumption you are making. State whether gourmet burgers and traditional fast-food hamburgers are a normal, inferior or luxury goods. Explain your answers.
c) A competitor offers a similar gourmet burger at a price of $12.50. The restaurant chain is contemplating whether to match the price. Would the franchise lose revenue on gourmet burgers sales if it charged $12.50? Justify your conclusion based upon your estimate of the own-price elasticity of demand. State any assumptions you are making. Interpret the value and meaning of this elasticity (use the mid-point method to calculate the own-price elasticity of demand).
d) The chain estimates that daily sales of fast-food hamburgers would decline by 21.22% if the price of gourmet burgers was reduced to $12.50. Specify and calculate the elasticity that can be used to explain this relationship between the price of gourmet burgers and sales of fast-food hamburgers. State any assumptions you are making. Interpret the value and meaning of this elasticity (use the mid-point method to calculate the elasticity).
e) Using the information from parts a), b), c) and d) of this question, provide a recommendation as to whether the cafe should reduce the price of a gourmet burger to $12.50 to increase total revenue. Use a price for hamburgers of $7.00 each and assume the supply of hamburgers is perfectly price elastic. State any other assumptions you make.
|
Market for automobile insurance-asymmetric information
: A perfectly competitive firm is producing 75 units of output. the market price is $7 and the firm's marginal cost is $8. the firm should: In an asymmetric market for used card, which of the following could be used to avoid a thin market? In the marke..
|
|
Use comparative static analysis
: Suppose the firm's profit maximization problem is to choose the labor input N so at to maximize: π = zF(K,N) – wN, where the firm's production technology is given by Y = zF(K, N) = zK^α*N*(1-α) , and 0
|
|
Cause reduction in the current price of stock
: Which of the following will cause a reduction in the current price of a stock? Suppose NYS decides to DECREASE its marginal income tax rate for households with incomes above $250,000. In the bond market, the likely result is
|
|
Prices to prevent unfair pricing by national chains
: A proposal has been advanced to limit advertising of pharmaceutical prices to prevent unfair pricing by national chains. You estimate that limits on price advertising will change the price elasticity of demand from -5.63 to -4.43. What economic effec..
|
|
What price is the cafe currently charging for gourmet burger
: A large multinational restaurant chain has introduced gourmet burgers in addition to the fast-food style hamburgers it has always sold. We consider here the actions of a single franchise’s store and its pricing policy. What price is the cafe currentl..
|
|
Adolescents actually reach the formal operational stage
: From research what proportion of adolescents actually reach the formal operational stage? What are some of the effects of early maturation for boys and girls? The age of first menstruation has been increasing or decreasing in the last century? Discus..
|
|
Identify role economists believe rational expectations play
: Write a 250 word posting in which you identify the role economists believe rational expectations play in determining how much impact a fiscal or monetary policy will have on the economy.
|
|
Completely finances community college education
: As part of his last act in office, suppose President Obama announces a new program in which the government completely finances a community college education. Use the intertemporal model to show graphically and explain the impacts of this program on t..
|
|
New wastewater treatment plant
: A region is considering two sites on which to locate a new wastewater treatment plant. Site A has been owned by the region for five years and the region intially paid $200,000 for the land. The current market value of the site is $400,000. Site B is ..
|