Question

Suppose that your group is the executive sales team for McDonalds. The CEO has given your team a proposal; To analyze the impact of raising the price of the Big Mac by 10% and raising the price of regular fries by 10%.

In order to provide your analysis, you need to find out how sensitive customers will be to a price change of Big Macs and fries. In order to find out how sensitive customers are to a price change, you will need to calculate the price elasticity of demand, describe what that means, and evaluate the impact on revenues.

For this activity, use the standard percent change formula (also known as the point method).

You have been given the following data on prices and changes in quantity demanded.

Big Mac:

Current Big Mac Price: $2

Current Big Mac monthly sales: 1 million

Estimated monthly Big Mac sales at the new price: 980,000

Regular Fries:

Current regular fry Price: $1.50

Current regular fry monthly sales: 2 million

Estimated regular fry monthly sales at the new price: 1.4 million

Part 1: Find the elasticity of demand for the Big Mac and fries.

Part 2: Find the total change in revenue for the Big Mac and fries.

Part 3: Use a demand curve graph to explain the change in revenue. You only need to show the demand curve on your graph.

You may upload a picture/file of your graph or use the creately template.

Answer #1

1) elasticity of demand =( change in quantity ÷initial quantity) ÷ (change in price ÷ initial price)×100

Mac burger =

Initial quantity =1000000 . New quantity = 980000

Initial price = $2. New price = $2.2( 10% increase)

- Elasticity = (200000÷980000)÷ ($0.2÷$2)×100 = 2.040

Fries =

Initial quantity = 2000000. New quantity =1400000

Initial price = $1.50 New price = $1.65(10%increase)

- Elasticity = (600000÷2000000)÷ ($0.15÷$1.5)×100 = 3

2) Mac revenue earlier = $2 ×1 million = $2million

Mac revenue now = $2.2× .98 million =$1.496million

- Change in revenue for mac - $0.504million

Fries revenue earlier = $1.5×2million =$3million

Fries revenue now = $1.65×1.4million = $2.31 million

- Change in revenue for fries -$0.69million

3) As price increased, demand decreased in both the cases.

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