Application Questions: 2. The elasticity for a Big Mac =-2, while the elasticity for all hamburgers...

Application Questions: 2. The elasticity for a Big Mac =-2, while the elasticity for all hamburgers =-.7 A) Why is the demand for Big Macs more elastic than demand for hamburgers? B) McDonalds decides to increase the price, does their total revenue increase or decrease? C) What if all hamburger chains got together and collectively decided to increase their prices, would they increase or decrease total revenue?

Expert Solution

A) The demand for Big Macs is more elastic than demand for hamburgers because its market is narrowly defined with the presence of so many substitutes while hamburgers as a whole has fewer substitutes so its market is broadly defined. Due to this reason, any price change for hamburgers will change its quantity demanded relatively less proportionately than the change in quantity demanded for Big Macs when its price changes

B) McDonalds decides to increase the price. Since elasticity for a Big Mac is more than 1, a 1% rise in price will result in reducing the quantity demanded by more than 1% so revenue will actually decrease

C) If all hamburger chains got together and collectively decide to increase their prices, then their revenue will increase because the elasticity for all hamburgers is less than 1. This implies that a 1% rise in price will result in reducing the quantity demanded by less than 1% so revenue will increase.

Rahul Sunny answered 2 years ago

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