Question

This lab assignment will correspond to Elasticities and Secondary Axis Graphs. There are two lab exercises listed below. Please complete this assignment in one Excel workbook in separate sheets for each exercise. You may work with one other individual (no more than two people per team) or by yourself. In Blackboard, open Lab3_Workbook. This will become the Lab Set that you turn in. Exercise 1. Taco Del Mar has completed a study of weekly demand for its tacos in Washington State’s regional markets. The study produced the following demand function: Q = 800 – 1,500P + 0.6A + 80Pop + 500Pc where Q is the number of tacos sold per store per store per week; A is the level of local advertising expenditure in dollars; Pop is the local population in thousands; and Pc is the average taco price of local competitors. For the typical Taco Del Mar outlet, P = $2.50, A = $6,000, Pop = 50, and Pc = $2.25 Open the Exercise 1 worksheet and program the elasticity worksheet (using the appropriate formulas) to answer each of the following:

a) Estimate the weekly revenue in dollars for the typical Taco Del Mar (given the above information).

b) What is the own price elasticity for Taco Del Mar tacos under typical conditions?

c) Should Taco Del Mar raise its taco prices? Discuss why or why not.

d) Using Excel, calculate the marginal revenue if Taco Del Mar increases its taco prices from the typical level. Hint: use a formula for marginal revenue and evaluate it at the “typical” price. e) Calculate the advertising elasticity for Taco Del Mar tacos.

f) Use the advertising elasticity to predict the change in Q (as opposed to the % change in Q) resulting from a 1% increase in advertising expense, holding all other factors constant.

g) Calculate the current cross price elasticity of local taco competitors.

h) Are the competitor tacos complements or substitutes? Explain why.

Answer 1

(a)

Q = 800 – 1,500 x 2.5 + 0.6 x 6,000 + 80 x 50 + 500 x 2.25 = 800 - 3,750 + 3,600 + 4,000 + 1,125 = 5,775

(b)

Own price elasticity (Ed) = (Q/P) x (P/Q) = - 1,500 x (2.5/5,775) = - 0.65

(c)

Since absolute value of Ed is less than 1, demand is inelastic, and increase in price will increase revenue. So price should be raised.

(d)

Q = 800 – 1,500P + 0.6 x 6,000 + 80 x 50 + 500 x 2.25 = 800 - 1,500P + 3,600 + 4,000 + 1,125 = 9,525 - 1,500P

P = (9,525 - Q) / 1,500

TR = P x Q = (9,525Q - Q²) / 1,500

MR = dTR/dQ = (9,525 - 2Q) / 1,500

Excel output:

P	Q	MR = (9,525 - 2Q) / 1,500
2.5	5,775	- 1.35

(e)

Advertising elasticity (Ea) = (Q/Q) x (A/Q) = 0.6 x (6,000/5,775) = 0.62

(f)

When advertising expense increases by 1%, demand increases by 0.62%.

(g)

Cross price elasticity (Ec) = (Q/Pc) x (Pc/Q) = 500 x (2.25/5,775) = 0.19

(h)

Since Ec > 0, an increase (decrease) in competitor price will increase (decrease) demand, the goods are substitutes.