McBurger hires you as a consultant to advise on its best strategy. You estimate
ID: 1168855 • Letter: M
Question
McBurger hires you as a consultant to advise on its best strategy. You estimate monthly demand for its burgers to be:
Qd = 26,000 - 10,000P + 4,000Pc -.8Y +0.5A
where the independent variables are respectively: P, price of McBurger’s burgers, PC, price of competitors' burgers, Y, per capita income, and A, McBurger’s advertising budget.You observe that competitors have, on average, priced their burgers at $3.50, while McBurger charges $2.50.Per capita income level in the store's geographic market is $15,000.McBurger's advertising expenditure is $20,000 per month.McBurger currently sells 13,000 burgers/month.
1. How much revenue does McBurger currently earn based on the information above? [2]
2. Is McBurger maximizing its revenues under current conditions? [Grading here is based solely on your calculations.] [2]
3. Based on the data given, McBurger should _______________ its advertising expenditure. [2]
Possible answers:
a) raise
b) lower
c) not change
d) we cannot say
4. What advice can you offer McBurger, based on the above information? [4]
Explanation / Answer
Pc = $3.50
Y = $15,000
A = $20,000
P = $2.50
1.
Qd = 26,000 - 10,000P + 4,000Pc – 0.8Y + 0.5A
= 26,000 – 10,000 (2.50) + 4,000 (3.50) – 0.8 (15,000) + 0.5 (20,000)
= 26,000 – 25,000 + 14,000 – 12,000 + 10,000
= 13,000
Revenue = $26,000 + $14,000 - $12,000 + $10,000
= $38,000 (Answer)
2.
No, revenue is not maximized under the current condition, since Qd × P Revenue.
Qd × P = 13,000 × $2.50 = $32,500 Revenue of $38,000.
3.
MB should lower its advertising expenditures.
The right option is B.
4.
MB has to decrease prices further for increasing the demand of the product. This has to be done very fast; otherwise his competitor will catch him.