Answer: a. 8625 b -0.37% c. no they should not increase the price
Explanation:
a. Q= 650 -1000P + 0.8A + 65Pop +500P
Q = 650 – 1000(2.50) + 65(70) + 500(2.25)
Q = 8625
When the Price of tacos is $2.50, 8625 tacos will be demanded
b. Own price elasticity
Own Price elasticity measures the sensitivity of demand to a change in the price of a good or service. Price elasticity shows how much a unit change in price will affect the quantity demanded. Firms use price elasticity to test if it is possible for a firm to generate more profits by decreasing or increasing the price of a good or service they are selling.
Price elasticity calculation.
a. Q= 650 -1000P + 0.8A + 65Pop +500P
Q = 650 – 1000(2.50) +0.8(6000) + 65(70) + 500(2.25)
Q = 8625
Now Assume price increased from $ 2.50 to $ 3.50
Q = 650 -1000P + 0.8A + 65Pop +500P
Q = 650 – 1000(3.50) + 0.80(6000) + 65(70) + 500(2.25)
Q = 7625. If the price increase by $ 1 quantity demanded will be 7625
P2 = 3.50, P1 = 2.50 Q2 = 7625 Q1 = 8625
Price elasticity = (Q2-Q1)/(Q2+Q1) divided by (P2-P1)/(P2+P1)
=(7625-8625)/(7625+8625) divided by (3.50-2.50)/(3.50+2.50)
= - 0.3692
Price Elasticity = - 0.37% (rounded off to two decimal point)
c. The Price elasticity is negative (-0.37%) meaning if Taco Del Mar increase the price by a unit ($ 1 for example) the demand for Taco Del Mar’s tacos will fall by 0.37%. Taco Del Mar should not increase the price of tacos as they are a negative Price elasticity which indicates an inverse relationship between the price of tacos and quantity demand of tacos. Taco Del Mar will however generate profits when the price of local competitors increases because competitor’s price increase will drive consumers /customers to Taco Del Mar.
