Question

1 and 2

Chapter 13 May 16, 2019 Name 1) Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. Using a graph, illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac. What is the total change in revenue received which results from this price decrease? 2) Arturo runs a Taco Bell franchise. He is selling 250 Gordita Supremes per week at a price of $2.75. If he lowers the price to $2.70, he will sell 251 Gordita Supremes. What is the marginal revenue of the 251st Gordita Supreme? lled with dali

Answer 1

Solution:

1) Due to such price change, or price decrease, total quantity of Big Macs increases from 4 to 5, thus, output effect = 5 - 4 = +1 unit. But with such price decrease, price charged also reduces for the first 4 Big Macs from $4.00 to $3.25, so price effect is explained using such price reduction = 3.25 - 4.00 = $0.75

Thus, loss in revenue from selling each of first 4 Big Macs for $0.75 less = 4*0.75 = $3

Additional revenue generated by increasing sales by 1 more unit = 1*3.25 = $3.25

Graphically, this can be shown as follows:

Price 1 5.0 4.5 4.0 Loss in Revenue 3.5 3.0 2.5 Demand curve Additional 2.0 Revenue 1.5 1.0 0.5 0 8 10 Number of Big Macs

Initial revenue = 4*4 = $16, revenue with price change = 3.25*5 = $16.25

So, total change in the revenue due to price decrease = $16.25 - $16 = $0.25

2) By selling 250 Gordita Supremes at a price of $2.75, total revenue = 250*2.75 = $687.5

By selling 251 Gordita Supremes at a price of $2.70, total revenue generated = 251*2.70 = $677.7

So, marginal revenue of 251st Gordita Supreme = total revenue with 251 GS - total revenue with 250 GS

Marginal revenue of 251st GS = 677.7 - 687.5 = -9.8

Thus, marginal revenue is negative, or more precisely, it is -$9.8