Management of Mr Taco has completed a study of weekly demand

Management of Mr. Taco has completed a study of weekly demand for its “old fashioned            tacos” in 23 regional markets. The study revealed the following demand equation:

            where Q is the number of tacos sold per store per week and P is the price of its own “old fashioned tacos” . A is the level of local advertising expenditure, pop is the local         population and P^c is the average taco price of local competitors. For the typical Mr. Taco    outlet, P =$1.50, A = $1000, pop = 40 and P^c = $1.

            (a) Estimate the weekly sales for the typical Mr. Taco outlet.

            (b) Calculate the price elasticity of demand for Mr. Taco’s “old fashioned tacos”. Also     calculate the advertising elasticity and the elasticity of demand with respect to the          competitors’ price. Should Mr. Taco raise its taco price? Explain.

Solution

Equation of demand curve is not given so we are taking hypothetical figures.

a) QD = -1000P+A+70P+200Pc

Qd = -1000(1.50) +(1000)+70(40)+200(1) = 3000 units

Weekly sales = 3000 units

b) EDp = P/Q*cofficent of demand curve with respect to price

1.5/3000*1000 = -0.5

b) Advertising elasticity = Advertisement /demand*change in adertisement/change in demand

= 1.5/3000*1000 = 0.50

Cross elastiicty of demand = Price/demand *change in demand of competitiors price/change in demand of our product

1/3000*200 = 0.066