Question

4. Analyze Subway’s “$5 footlong” promotion. Assume the original price is $6 and you’re trying to decide whether or not it makes good business sense to put them on sale for $5. -Do you think elasticity for Subway sandwiches is elastic or inelastic? By decreasing the price will this increase or decrease total revenue? -Bonus: If it costs $4 to make the sandwich do you think this will increase or decrease profit?

Answer 1

Elasticity for subway sandwiches is elastic in nature . Sandwiches are not an essential part of daily diet and subway is a food chain which has many close substitutes . There are other foods chains and shops too selling sandwiches . So for subway the demand is quite elastic in nature .

By decreasing the price the demand will rise more than proportionately to price . So we expect an increase in total revenue . People will buy more sandwiches from subway since it is a famous brand when the price drops .

It will increase profit . The marginal cost is $4 and marginal price is $5 . So the marginal revenue is still more than marginal cost .