Question

Management at the Macho Burrito Hacienda has completed a study of weekly demand for its super-supremo-dos-nacho-double-grande-mucho-muncho burritos. The study revealed that the demand for the four-pound cheese-stuffed, bacon-smothered, grease-dripping, colossal-sized macho burrito meal (X) is given by the following equation:

                                    Q_X = 1,320 -1,000 P_X + 700 P_T + 7 I + 200 A

where  Q_X           = the number of the four-pound macho burrito meals sold

                        P_X        = the price of the four-pound macho burrito meals

                        P_T            = the price of bacon cheeseburger double-decker tacos

                        I           = per capita income

                        A         = Advertising expenditure                  

            Currently P_X = 5, P_T = 2, I = 40 and A = 20.

1. Calculate the elasticity of demand for burrito meals with respect to the price of burritos, the price of tacos, and per capita income.

(b)       Should the Macho Burrito Hacienda raise the price of its burrito meals to increase Total Revenue? Why or why not?

(c)        Calculate consumer surplus at the Revenue-maximizing price.

(d)       If the cost per burrito is $3 and Macho Burrito Hacienda behaves as a monopolist, how many burrito meals will be sold and at what price?

Answer 1