Question

1. Panda Express

Panda Express has opened a new outlet in Dallas, Texas. Autumn Musser, the new owner believes as this is a popular chain, the firm has some degree of market power in setting prices. Using linear regression, she estimates the demand equation with the following theoretical specification of the linear model of selling large-size pizzas as :

Q = a + bP + cM + dP_Al - eP_Pepsi

            where,

                        Q= sales of Kung Pao Chicken dish at Panda Express

                        P= price of large size Kung Pao Chicken dish at Panda Express

                        M= average annual family income in Dallas

                        P_Al= price of a large size Kung Pao Chicken dish at Golden China in Dallas

                        P_BMac = price of a large Dr. Pepper bottle sold at Panda Express

The empirical model is estimated as:

Q = 1200 – 200 (9.50) + 0.09 (25,000) + 101.5 (12) – 72 (1.50)

Calculate the own price, income and cross-price elasticities of Panda Express (show all work).   Based on these calculations, please discuss the following business strategies, which Autumn should take to evaluate her business.

1. Should Autumn reduce or increase the price of Kung Pao chicken to maximize revenues. Why or why not? Explain
2. If the economy of Dallas declines with average income falling by 10%, what will be the new sales of Panda Express? Show calculations.
3. Is Golden China a weak or a strong competitor of Panda Express? Why? Explain
4. How many more Dr. Pepper bottles will be sold at Panda Express if the price of Kung Pao chicken sold rises by 10%? (Show all work).

Answer 1